Chipotle Mexican Grill Earnings Preview: Increasing Customer Count To Drive Comparable Sales In Q4

The fast casual segment, a new concept for the restaurant industry, is fast increasing in popularity in the industry, and over the last three years it has grabbed people’s attention. Top fast casual restaurants, such as Chipotle Mexican Grill (NYSE:CMG), have become a threat to traditional quick service restaurants (QSR), as people are  attracted towards the more customized, freshly prepared, and high quality of food, as well as the inviting ambiance these type of places  offer. These restaurants combine the quick service of fast food restaurants, with the quality of casual dining restaurants. Chipotle’s  company’s stock has risen nearly 47% over the last twelve months.

Chipotle is scheduled to release its annual results for the fiscal 2014 year on February 3. ^[1] Chipotle has logged double digit revenue growth over the last 5 years.  In 2014, the company maintained its impressive performance, with a 31.1% year-over-year (y-o-y) increase in the net revenues to $1.08 billion for the third quarter, primarily driven by a double digit growth in the comparable store sales, which grew at 20%. ^[2] As a result, the Mexican cuisine specialist managed to produce diluted EPS of $4.15 in Q3, up 56% y-o-y. The price hikes and increasing customer count were the primary factors that drove the comparable store sales. 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 $627 price estimate for Chipotle, which is around 10% lower than the current market price.

See Our Complete Analysis For Chipotle Mexican Grill

Comparable Store Sales To Remain Strong

Chipotle’s success is a result of changing consumer dining habits, as well as high industry-wide prices. According to the NPD’s foodservice market research, the fast food restaurants have been negatively impacted by the changing dining habits in the U.S., primarily driven by changing economic and cultural conditions. The customer traffic in QSRs was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. ^[3] However, among all this, the fast casual segment has benefited the most, as people with increasing disposable incomes are trading up to higher quality organic food. Chipotle has been witnessing stable customer count growth. Moreover, the company believes that its high operational efficiency, innovative and delicious food items, as well as “food with integrity” campaign might drive its growth even further.

Furthermore, due to high commodity inflation in mid-2014, Chipotle raised the prices of its steak burritos by 4-6%, and as a result passed on the rising costs to the customers. However, the customers were aware of the inflation and were willing to pay extra  for the food. As a result, 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 in the third quarter. According to the United Stated Department of Agriculture (USDA), meat prices will likely rise further in 2015, due to the Texas/Oklahoma drought and Porcine Epidemic Diarrhea virus (PEDv). Moreover, further disturbances in weather situations in those regions might drive up the prices of food. ^[4] This could mean, in case of further inflation, we might see a nominal price hike in menu items again in 2015. However, if the supermarket (at-home industry) witnesses a lower inflation than the food away-from-home industry, the latter might witness a decline in customer traffic.

Trefis estimates the average check for the company in 2014 to effectively grow by 3% y-o-y, and a net revenue growth of approximately 20% in 2014.

Chipotle Might Accelerate Expansion Plans

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. According to the company, the new store volumes are outpacing the volumes of existing stores at a faster pace than they had ever before. Chipotle added 43 new restaurants in the third quarter, bringing the total restaurant count to 1,724. Looking at the progress, the company might easily meet its annual guidance of 180-195 net new restaurant openings in 2014. Furthermore, the company expects to open 190-205 restaurants in 2015, including 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 remaining  restaurants, there are 8 ShopHouse Southeast Asian Kitchen restaurants,  and one Pizzeria Locale restaurant, a fast-casual pizza concept. These two new growth  concepts, are designed on the similar model as that of Chipotle, and are in their early stages of development.

With top fast food chains keen on expanding internationally, Chipotle might look forward to accelerate its store expansion in high GDP countries in Europe and Asia as well. There is a lot of potential growth for the company in these markets, where the concept of fast casual dining is already catching up, and customers might love to have one of the top chains of this new category in their country.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Chipotle Mexican Grill Q4 2014 earnings conference call [↩]
2. Chipotle Mexican Grill: earnings call transcript, Q3 2014 [↩]
3. Income gap and shrinking middle class take a toll on restaurant industry [↩]
4. Food Price outlook 2014-15 [↩]