Chipotle’s Earning Preview: Increasing Customer Count & New Store Openings To Drive Sales

Chipotle Mexican Grill (NYSE:CMG) is scheduled to release its third fiscal quarter earnings report on October 2o, 2014. ^[1] In the last couple of years, the Mexican cuisine specialist has had a tremendous run, due to increasing customer traffic in the fast-casual segment. As a result, the company has been witnessing strong comparable store sales growth and accelerating revenue growth. In a short span, the restaurant chain has managed to outpace all other fast-casual restaurants and has grabbed people’s attention. Chipotle’s stock rose by nearly 47% over the last 12 months.

In the second quarter, Chipotle delivered excellent results, sustaining the momentum it has gained over the last one year. The company’s revenue for Q2 rose to $1.05 billion, up 28.6% year-over-year, primarily driven by an increase of 17.3% in the comparable store sales. Increased customer count and higher industry-wide average spend per visit are the major factors driving the company’s top-line growth. ^[2]

We have a $632 price estimate for Chipotle, which is about 2% lower than the current market price.

See Our Complete Analysis For Chipotle Mexican Grill

Increased Commodity Costs Might Not Hamper Chipotle’s Growth

Food inflation has been threatening the restaurant industry for the last 9 months. Rising commodity costs and escalating prices of beef & other meat products have forced quick service restaurants (QSRs) such as McDonald’s (NYSE: MCD), Yum! Brands, Subway and Burger King (NYSE: BKW) to raise their menu prices. According to USDA (United States Department of Agriculture), the production of beef declined 6% year-over-year in the 8-month period from January to August in 2014, whereas the red meat production dropped 4% in the same period. ^[3] Moreover, the agency expects the production of beef and other meat products to fall further in the next year. ^[4] As a result, the prices of meat products are expected to rise further, due to prevailing drought and mad cow disease. The Agriculture Department forecasts prices of pork and beef to rise by 6.5% to 7.5% in 2014, whereas the poultry, fish and meat category as a whole is expected to rise by 4%to 5%. ^[5]. As a result, the customers were aware of the food inflation and were ready to pay extra dollars at restaurants, rather than buying expensive food and preparing it at home. Consequently, most of the top restaurant chains increased their menu prices of their most affected items.

Chipotle widened the price gap between its steak burritos and chicken burritos in early May. The price of an $8 burrito increased by 4%-6%, or 32-48 cents. Many feared that the price hike would affect the company’s customer traffic, but it had minimal impact on them. ^[6] In fact, people are willing to pay 4-5% extra for hygienic and better quality food because of prevailing health concerns. The average check at Chipotle is among the highest in the industry with average spend per visit of $11.6 in 2013. Trefis estimates the figure to further rise by 3% year-over-year by the end of 2014.

• Innovative Menu Items and Healthier Dining Preferences Might Further Increase Customer Traffic

According to the recent NPD’s foodservice market research, the restaurant industry has been negatively impacted by the changing dining habits in the U.S., primarily driven by changing economic and cultural conditions. The customer traffic growth in QSRs was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. ^[7]

Source: NPD group

However, the segment to benefit the most in this scenario is the fast-casual segment with its affordable prices coupled with healthy organic food freshly prepared in an up-scaled and inviting ambiance. 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. (See Impact Of Changing Dining Preferences In The U.S. On Chipotle Mexican Grill)

The above mentioned factors might boost the company’s revenues, which might rise by 28% year-over-year to cross $1 billion in this quarter too.

Expansion In Key Markets To Remain The Major Focus For Chipotle

For the last 3 years, growth from new store openings has proved to be a significant driver in the company’s sustained top-line growth. In the second quarter, Chipotle added 45 new restaurants in the second quarter, bringing the total restaurant count to 1,681. Chipotle ended the Q2 with $1.1 billion in cash and cash equivalents and mentioned that it will use most of the cash to invest in well performing and high returning restaurants. Considering the company’s guidance of 180-195 net new restaurants in 2014, we might expect nearly 50 net new restaurants in the third quarter. Although most of the company’s restaurants are located in the U.S., there’s still a lot of scope for domestic expansion. Chipotle expects around 70% of the restaurants to be in established markets, 15% in the developing areas and the rest 15% in the new untested U.S. markets.

The company raised its guidance for third-quarter comparable store sales, mentioned in its second quarter earnings call transcript. In conclusion, the company might deliver another impressive quarterly result.

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1. Chipotle Mexican Grill: Q3 2014 earnings conference call [↩]
2. Chipotle Mexican Grill: earnings call transcript, Q2 2014 [↩]
3. USDA Red meat and poultry production, September 30, 2014 [↩]
4. WASDE report, September 30, 2014 [↩]
5. Meat prices continue to rise, www.nytimes.com)) In comparison to this, overall inflation is reported to be around 2% for a wide range of food products.
   • Higher Food Prices To Accelerate Revenue Growth

   Fast casual restaurants, which are technically the hybrid of quick service restaurants and fine casual dining restaurants, have gradually used the situation to their advantage. According to the report released by the Bureau of Labor Statistics in September, the percentage change in Consumer Price Index (CPI) for the 12 months ended period was more for food-at-home (2.9%) than for food away-from-home (2.5%). ((Consumer Price Index summary, Bureau of Labor Statistics [↩]

6. Customers willing to pay the price [↩]
7. Income gap and shrinking middle class take a toll on restaurant industry [↩]