Price Hikes & Increased Customer Traffic Drive Chipotle’s Q3 Revenues

Chipotle Mexican Grill (NYSE:CMG) delivered yet another impressive performance in its third quarter results on October 20, sustaining the strong momentum witnessed in the first half of the year. The company reported a 31.1% year-over-year (y-o-y) increase in the net revenues to $1.08 billion for the quarter, primarily driven by a double digit growth in the comparable store sales, which grew at 20%. ^[1] Comparable restaurant sales is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation. As a result, the Mexican cuisine specialist managed to produce diluted EPS of $4.15, up 56% y-o-y.

The price hikes and increasing customer count were the primary factors that drove the comparable store sales. In a short span, the restaurant chain has managed to outpace all other fast-casual restaurants and has grabbed people’s attention. The company’s net operating margins rose to 28.8%, an increase of 200 basis points, primarily due to lower food costs and effective management. As a result the net income rose 57% to $130.8 million.

We have a $632 price estimate for Chipotle, which is about 3% lower than the current market price.

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Double-Digit Growth In Comparable Store Sales

At a time when traditional quick service restaurants are hardly managing to deliver low single digit comparable sales growth, Chipotle’s comparable store sales rose nearly 20% y-o-y, due to well-planned price hikes in the menu and efficient marketing to attract customers. This growth boosted the average sales volume for the restaurants to an all time high of $2.4 million.

• Higher Average Spend Per visit Due To Increased Prices Of Menu Items

Chipotle raised the prices of its steak burritos by 4%-6%, or 32-48 cents, whereas the price of chicken burritos was slightly raised. Many feared that the price hike would affect the company’s customer traffic, but it had minimal impact on them. ^[2] Customers are willing to pay a little extra for better quality of food rather than paying less for uninspiring food items at traditional fast food restaurants. The effective price increase of 6.3%, coupled with additional revenue growth from catering services resulted in a tremendous growth in the average check for the company.

As a result of the price hike, Chipotle’s average spend per visit grew 8.5%. The company believes that its loyal customer base and innovative food menu prepared with high quality ingredients were the key factors for its highest comparable store sales growth ever. Chipotle believes the comparable sales growth in Q4 2014 to be in the mid teen digits, however, it also believes that the comparable sales growth in fiscal 2015 might be slightly lower than this year, as the impact of menu prices will begin to fade out gradually.

• Customers More Attracted To Better Food Quality With Convenient Dining Experience

People in the U.S. are gradually changing their dining preferences and drifting towards organic food items. Moreover, Chipotle offers some unique, innovative and delicious food items, which have grabbed people’s attention off-lately. With the commodity inflation, most of the top fast food chains have compromised on their quality of food for low costs and ease of preparation. On the other hand, Chipotle carried on its ‘food with integrity’ program and charged a fair price at the same time, without compromising on the taste and quality. Due to changing dining preferences, people drifted more towards healthier food options. As a result, during the quarter, the company’s witnessed an increase of six transactions during the peak lunch hour and an increase of six transactions during the peak dinner hour. Increased transactions led to accelerated revenue growth for the company.

Increasing Food and Labor Costs To Impact The Margins In Next Few Quarters

Chipotle’s lower food costs and consistently strong transaction trends led to 200 basis points improvement in the restaurant level operating margins (28.8%), as the operating costs decreased by 60 basis points y-o-y. Although, efficient marketing led to lower marketing and utility costs, the company expects the marketing costs to increase about 1.5% in the fourth quarter. Moreover, Chipotle expects the food costs to stabilize in the fiscal 2015, despite the elevated costs of beef and other meat products. On the other hand, the price of avocado is expected to further rise due to a shortage of supply caused by drought conditions in California and Chile. According to Economic Research Services (ERS) USDA, the prices of fresh fruits might increase up to 4.5% to 5.5% in 2014 and close to 2.5% to 3.5% in 2015. ^[3]

In addition, Labor costs decreased 160 basis points y-o-y to 21.2% of sales, driven by higher sales volume. However, the company expects the labor costs as a percentage of sales to rise in the coming few quarter, on the anticipation of seasonal lower sales in the fourth quarter.

Chipotle Keen On Expansion With The Introduction Of Growth Feed Concepts

Chipotle has been focusing on its new store openings, as the opening volumes have been a major factor in the company’s top-line growth. According to the company, the new store volumes are outpacing the volumes of existing stores at a faster pace they had ever before. Chipotle added 43 new restaurants in the third quarter, bringing the total restaurant count to 1,724. The company’s pace is in line with its guidance to open 180-195 restaurants by the end of 2014. Furthermore, the company expects to open 190-205 restaurants in 2015, which will include a small number of international, ShopHouse and Pizzeria Locale restaurants.

Out of the 1,724 restaurants, 1,698 Chipotle restaurants are in the U.S., seven in Canada, six in England, three in France and one in Germany. Out of the rest 9 restaurants, eight restaurants are the ShopHouse Southeast Asian Kitchen restaurants and one Pizzeria Locale restaurant, a fast-casual pizza concept. These two new growth feed concepts, are designed on the similar model as that of Chipotle, and are in their early stages of development.

Apart from these new store openings, the catering business is proving to be a huge success and the company is planning on introducing the catering business in New York in 2015, as catering accounted for around 1% of the sales in the first nine-months of 2014. Chipotle’s growth is among the highest in the industry and with the present situation, where every top fast-food chain is struggling to keep the customer count stable, the company is bound for further growth in the next few quarters.

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1. Chipotle Mexican Grill: earnings call transcript, Q3 2014 [↩]
2. Customers willing to pay the price [↩]
3. Food Prices Outlook, 2014-15 [↩]