Increasing Customer Traffic Drives Chipotle’s FY 2014 Revenues

Chipotle Mexican Grill (NYSE:CMG) finished the fiscal 2014 year with the same impressive vigor that it showed throughout 2014. The company reported net revenues of $1.1 billion in the fourth quarter, an increase of more than 26% year-over-year (y-o-y), driven by strong comparable store sales growth of 16%. ^[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. Effectively, the company managed to post diluted EPS of $3.84, up more than 50% y-o-y. The company’s net operating margin rose 100 basis points in the fourth quarter to reach 26.6%.

While the company beat analysts’ estimates on the bottom line, they were slightly light on the top line ($1.07 billion vs $1.075 billion estimate), as well as comparable store sales being slightly lighter than general consensus, and talk of higher food costs, and possibly raising beef prices later this year, bothered some investors when the stock opened. As a result, CMG stock dropped nearly 7% soon after the results were out. Chipotle expects the comparable store sales in 2015 to range in the low to mid-single digit growth, with higher growth in the first quarter, and a slowdown in sales in the next few quarters. Less than expected comparable sales in Q4, coupled with early warnings of slower sales growth sent the stock price from $726 to $676.

For the whole fiscal year 2014, Chipotle generated nearly $4.1 billion in net revenues, up almost  28% y-o-y, with yearly comparable sales growth of 16.8%. Strong food culture and menu innovation helped the company reach diluted EPS of $14.13 for the year 2014, up 35% y-o-y. The net operating margin for the whole year was 27.2%, up 60 basis points y-o-y, primarily driven by favorable sales leverage partially offset by high commodity costs.

We have a $627 price estimate for Chipotle, which is around 10% lower than the current market price.

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Strong Comparable Sales Growth

Chipotle’s success is a result of changing consumer dining habits, as well as high industry-wide prices. The fast casual segment has benefited by the changing scenario, as people with increasing disposable incomes are trading up to higher quality organic food. Many of the top quick service restaurants (QSR) are hardly delivering mid single-digit comparable sales growth, whereas Chipotle has been reporting double digit comparable store sales growth for the past several quarters. Chipotle’s strong food culture, as well as efficient marketing and operational activity, have attracted people’s attention. As a result, the company has been witnessing an increase in customer count, despite high menu prices.

• High Standards Of Meat And Other Food Products

Chipotle has always been confident of its innovative and delicious food items, as well as ‘food with integrity’ campaign. The company has always made their decisions keeping the customers’ preference in mind, and has never compromised on the quality of the food products. The company has suspended one of its pork suppliers in the U.S. after a recent audit, on claims of below standard animal welfare protocols. This affected the supply of Carnitas to about one-third of the company’s outlets. However, the decision of the company to not shift to pork from conventionally raised pigs went down well among the customers. Moreover, Chipotle uses meat that comes from animals raised in natural environments and without the use of antibiotics.  According to the company’s research, the number of people who prefer to eat locally grown food has increased over the last three  years. Moreover, such high standards and better quality of food have attracted more customers over the last few years, leading to a gradual improvement in comparable store sales.

• Increase In Average Check & Customer Count

During the fourth quarter, average peak lunch hour transactions increased by three, whereas average peak dinner hour transactions increased by five. This led to an increase of 8.3% in the average spend per visit, driven by the price hikes in mid 2014. 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. The effective price increase of 6.3% in mid-year, coupled with additional revenue growth from catering services resulted in a tremendous growth in the average check for the company.

Chipotle expects the comparable store sales in 2015 to range in the low to mid-single digit growth, with higher growth in the first quarter.

Chipotle Keeps Up On Expansion Plans

During the Q4, the company added 60 new restaurants taking the total count for the year 2014 to 192 new openings, which is on the higher end of the yearly guidance. 80% of these new developments were in the established markets. In 2015, Chipotle expects to open 190 to 205 new restaurants with same proportionate distribution in all markets.

As of December 31, 2014, the company had 1,783 restaurants, including 1,755 Chipotle restaurants in the U.S. and 7 of them in Canada. Moreover, these restaurants also include 9 ShopHouse Southeast Asian Kitchen restaurants, and two Pizzeria Locale restaurants, a fast-casual pizza concept. These two new growth concepts are designed on a similar model as that of Chipotle, and are in their early stages of development. The ninth ShopHouse was opened in Washington, D.C. and a new Pizzeria Locale outlet was opened Kansas.

With top fast food chains keen on expanding internationally, Chipotle might look forward to accelerating 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.

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1. Chipotle Mexican Grill Q4 2014 earnings call transcript [↩]