Chipotle Mexican Grill Earnings Preview: All Eyes On Comparable Store Sales Growth

Riding on a strong increase in global net revenues, due to impressive growth in comparable store sales and customer traffic, Chipotle Mexican Grill (NYSE:CMG) is all geared up to report yet another robust sales result in its Q1 earnings report to be released on April 21. ^[1] Chipotle is the leader in the fast-casual segment and is one of the fastest growing restaurant brands in the U.S. The company has been able to attract customers and investors, with 50% growth in the net revenues over the last few years. Moreover, the company’s stock grew more than 25% from $531 to $667 in 2014, primarily due to strong financial results.

In the fiscal 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. ^[2] 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. For Q1 2015, experts expect the company to report EPS of $3.62, with revenue of $1.1 billion.

We have a $673 price estimate for Chipotle, which is roughly the same as the current market price.

See Our Complete Analysis For Chipotle Mexican Grill

Same-Store Sales – A Key Growth Driver

Same-store sales, or 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. In the fiscal 2014, Chipotle delivered a comparable store sales growth of 16.8%, primarily driven by increase in customer traffic, as well as by an increase of 8.3% in average customer spend. In the first two months of 2015, most of the restaurants in the U.S. reported a decline in sales, due to extreme weather conditions in some parts of the country.

According to the National Restaurants Association, 60% of restaurant operators reported an increase in same-store sales in the twelve month period ended February 2015. ^[3] Sales at these fast casual restaurants are strongest at lunch hours, and the traffic at that time is comparable to that in casual dining restaurants. During the fourth quarter in the fiscal 2014, average peak lunch hour transactions increased by three, whereas average peak dinner hour transactions increased by five. According to Euromonitor, Americans spent more than $21 billion at fast casual restaurants last year. Below is the chart for the monthly change in restaurant traffic in the U.S.

Source: www.Statista.com

According to MillerPulse survey, overall restaurant same-store sales rose 3.3% in March 2015, despite the decline in customer traffic in March. The customer traffic decline indicates the decline in total demand in the industry, despite the improving economy and lower gas prices. ^[4] Before dropping in February 2015, the customer traffic improved for 7 straight months. However, the decline in the last two months is primarily due to harsh weather conditions.

According to Trefis estimates, Chipotle’s average customer spend per visit rose 12.4% to $13.05 in 2014, whereas the average customer traffic grew 1.2%. 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’s consistent growth in the same-store sales has been a primary driver for its extraordinary revenue growth. The company expects its comparable sales to be the highest in the industry in the first quarter, and expects it to decline in the coming few quarters.

Keeping The Standards High

With its innovative and delicious food items, Chipotle’s ‘food with integrity’ campaign has been its primary driver for attracting more customers. The company has always made their decisions keeping the customers’ preference in mind, and has never compromised on the quality of the food products. In the last quarter, 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.

Chipotle Might Accelerate Its Expansion Plans

In 2014, Chipotle added 192 net new stores taking the total count to 1,783, including 1,755 Chipotle restaurants in the U.S. and 7 of them in Canada. The number of stores is still less than compared to that of McDonald’s and Burger King. Most of the Chipotle stores are located in California and New York, with a lot of scope for expansion in the less targeted areas. 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.

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.

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, earnings conference call, Q1 2015 [↩]
2. Chipotle Mexican Grill Q4 2014 earnings call transcript [↩]
3. Restaurant Performance index remained positive in February as softer sales and customer traffic levels were offset by a more optimistic outlook [↩]
4. Report: same-store sales rise 3.3% in March [↩]