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Chipotle (CMG) to Report Q2 Earnings: Will it Disappoint?

Chipotle Mexican Grill, Inc. CMG is scheduled to report second-quarter 2017 results on Jul 25, after market close.

Last quarter, the company delivered a positive earnings surprise of 25%. However, the trailing four-quarter average earnings surprise is a negative 8.59%.

Chipotle Mexican Grill, Inc. Price and EPS Surprise

Let’s see how things are shaping up for this announcement.

Factors Likely to Affect Q2 Results

Chipotle’s new brand-management efforts, along with various sales-building initiatives like menu innovation, simplification of restaurant operations and increased brand marketing should aid in improving guest experience and reinstate customer affinity for the Chipotle brand. This, in turn, might drive its top- and bottom–line performance in the to-be-reported quarter.

Moreover, Chipotle claims to be the only national restaurant brand to use no added colors, flavors or preservatives of any kind in its ingredients. The company’s enhanced focus on making better food accessible to everyone is thus expected to aid in bringing back health-conscious customers and improving sales in the quarter.

Meanwhile, the rollout of “Smarter Pickup Times” technology in all its restaurants that offer digital ordering is anticipated to further drive sales as it improves the digital ordering experience.

However, costs associated with marketing and promotional initiatives to connect with its customers, implementation of food safety measures and higher labor expenses are likely to continue thwarting the quarter’s profitability.

In fact, during the first-quarter conference call, management declared that they expect a short supply environment for avocados that will add 40 basis points (bps) to the company’s food costs in the to-be-reported quarter. Furthermore, marketing and promotional activities are expected to total about 3.6% to 3.7% of sales in the quarter, due to the brand’s national TV campaign.

Additionally, a soft consumer spending environment in the U.S. restaurant space is expected to limit revenue growth.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for Chipotle this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here as elaborated below.

Zacks ESP: Chipotle has an Earnings ESP of -2.74%. This is because the Most Accurate estimate is $2.13, while the Zacks Consensus Estimate is pegged higher at $2.19. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Chipotle has a Zacks Rank #4 (Sell).

As it is we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider from the Zacks categorized Retail–Restaurants industry, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

McDonald’s Corporation MCD has an Earnings ESP of +1.23% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Wingstop, Inc. WING has an Earnings ESP of +6.67% and a Zacks Rank #3.

YUM! Brands, Inc. YUM has an Earnings ESP of +1.64% and a Zacks Rank #3.

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