Chipotle Sales Surge At The Expense Of Margins

Chipotle Mexican Grill (NYSE:CMG) posted a solid set of numbers in its second quarter earnings helped by strong growth in the company’s same-store sales. Total revenues were up 18.2% to $816.8 million, helped by 5.5% growth in same-store sales and the addition of new restaurants. The company’s net income for the quarter stood at $87.6 million or $2.82 per share, an increase of 10% over the previous year quarter. Shares of the company jumped 5% after the earnings release. ^[1]

Comparable restaurant sales accelerated to 5.5% after a disappointing 1% growth in the first quarter. Chipotle is in the middle of implementing menu price hikes at its restaurants across the country, and the effect of it was evident on the increased sales. Some of the newly launched products such as ‘Sofritas’ or the margarita cocktails could have boosted the sales as well.

Comparable sales, or same-store 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.

See full analysis for Chipotle Mexican Grill

Margins Under Pressure

The high cost of raw materials have eaten into the margins lately; however, the price hikes brought some relief. For the quarter, food, beverage and packaging accounted for 33.1% of the sales, which is around a 100 basis points more than the previous year figure. Other expenses such as general & administrative, labor and occupancy were mostly stable. Historically, Chipotle has often clocked comparable sales growths of >10%, and therefore the revenue growth had outpaced the rate at which the fixed costs have grown.

Now that the restaurant chain is beginning to mature, you will find that the improvements in the fixed costs, as a percentage of sales will be gradual. Chipotle’s reported operating margins fell 160 basis points to 27.6%, primarily due to the negative impact of the high food and marketing costs.

Restaurant Addition Going Smoothly

The company is on track to add about 180 new stores in 2013. It opened 44 new restaurants in the second quarter taking its six month tally to 92. Recently, the company also opened its second ShopHouse Kitchen in Los Angeles. In the long term, we expect the rate of addition to slow down since we estimate its not possible to add 200 new restaurants a year without cannibalizing the sales. However, if the expansion of rate of ShopHouse were to pick up, we could see some upside to our estimates.

Investors see ShopHouse as an attractive proposition with a potential for many more such restaurants within the U.S. in the next few years. As of now, there is no concrete proof that ShopHouse growth will indeed replicate that of Chipotle’s stores. Therefore, our forecasts are conservative at the moment.

We have revised our price estimate for Chipotle to $394, which is roughly in line with the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Chipotle Mexican Grill, Inc. Announces Second Quarter 2013 Results, ir.chipotle.com [↩]