Chipotle Reports Strong Numbers; Same-Store Sales Surge 9.3%

Chipotle Mexican Grill (NYSE:CMG) reported very strong fourth quarter numbers as sales blew past expectations. The same-store sales surged 9.3%, helped primarily by higher customer traffic. ^[1] Same-store sales, or comparable 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. The same-store sales growth is the most widely followed metric for Chipotle, with the headline figure often causing huge movements in the stock price. Shares of the company jumped more than 10% in the after hours trading.

We have a $440 price estimate for Chipotle, which is about 20% lower than the current market price.

Solid Set of Numbers

Chipotle’s total revenues in the fourth quarter rose 20.7% to $844 million while the operating income jumped 26.5% to $129 million. The company’s net income stood at $79.6 million, or $2.53 per share vs $1.95 per share in the previous year quarter.

Sales were boosted by catering, which now already accounts for 1% of the total revenues. Chipotle introduced the catering program at its restaurants in Colorado at the start of 2013. By October, the program had been extended to restaurants on a nationwide basis except at its restaurants in New York City.

Catering is a good decision by the company. Traditional fast-food (say, McDonald’s) is generally not considered an option for catering events. On the other hand, traditional catering services charge anything starting from the $25 mark per person for food that is considered premium-quality. Chipotle comes in with an offering that can be considered mid-way – at around $12-$13 per person, and thus offers an attractive value proposition to its customers.

The company’s sales were also buoyed by the availability of new items such as margaritas and sofritas, introduced in the first half of 2013. Although available at only 40% of the restaurants, sofritas already accounts for 3% of the sales. ^[2]

However, it is also important to note that there were a number of factors such as several menu additions and incremental revenue from catering, which boosted the overall sales in the fourth quarter. While Chipotle should be credited for efficiently executing these strategic changes, the fact is that generating sales growth of this magnitude might not be sustainable simply because one cannot expect so many one-time revenue additions in each and every quarter. Going forward, it will be difficult for the company to sustain similar sales growth figures, according to our estimates.

Food Costs Still High

The cost of food, beverage and packaging (as a % of revenues) increased 40 basis to 33.9%, which is on the higher side of the historical range.  At the start of 2013, the company’s management had to decided to raise the menu prices during the summer but eventually deferred the move.

Furthermore, prices of some of the extensively used commodities by Chipotle, such as avocados and beans, continue to remain persistently high. As a result, the company expects the cost of raw materials to push up even higher in 2014. Chipotle estimates the cost of food, beverage and packaging could account for as much as 34.5% of the revenues, excluding the impact of any price hikes.

On the other hand, strong sales growth more than offset the growth of fixed costs such as administrative, and labor and occupancy expenses. Overall, restaurant-level operating margins jumped 100 basis points to 25.6%. If the same-store sales were to slow down in the subsequent quarters, further expansion of margins is unlikely to take place.

Restaurant Expansion Plans On Track

Chipotle added 56 new restaurants in the fourth quarter to take the full year tally to 185 restaurants. As of December 31, 2013, there were 1,595 restaurants operated by the company, most of which are in the U.S. In doing so, the company incurred an expense of $200 million. Chipotle intends to continue the momentum into 2014 by adding another 180-195 new restaurants.

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

1. Chipotle Mexican Grill Investor Relations [↩]
2. Chipotle Mexican Grill Q4 2013 Earnings Transcripts [↩]