Chipotle: Revenues Rising, Comp Sales Positive, Costs Declining: Signs Of A Turnaround?

Chipotle Mexican Grill (NYSE: CMG) is off to a strong start in 2017. The company reported its Q1 2017 earnings on April 25^th and beat analyst expectations in both revenues and EPS (earnings per share). The company also reported strong growth in same store sales, higher than anticipated. While comparables for this quarter are softer as the company was reeling under a severe impact of the E. coli food virus last year, Chipotle reported a 28% increase in revenues year on year (y-o-y) and a nearly 17% increase in comparable sales. Below is a summary of the financial performance of the company in Q1 2017:

Chipotle has managed to control its costs in this quarter, impacting the bottom line positively. The company’s better performance in this quarter can be attributed to the continuing simplification of its operations, strong focus on guest experience, improved execution of its digital initiatives, and thorough and ongoing manager and crew training. In the past few months, the company revamped its Restaurateur program, which identifies its best managers. The simplification of this program has been instrumental in improving customer service and delivery. An overall improvement in customer sentiment towards the company can be seen in its results.

In Q1 2017, food costs were around 34% of revenues which is a 150 basis points decline year on year. As testing costs and food waste decline the company managed to reduce its food expenses. However, higher avocado prices continue to impact Chipotle and this decline was offset partially by these rising prices.  Below is a summary of operating expenses of Chipotle:

The above table shows that the company has achieved a reduction in expenses  across the board compared to the same quarter in the previous year. However in Q1 2016, Chipotle incurred higher expenses as it was spending heavily on food safety measures and promotions to recover from the E. coli impact. Expenses have come down since then as the company has reduced its promotional activity and sales leverage as customer traffic increases. This reduction led to a nearly 18% restaurant level operating margin which is very encouraging.

Although Q1 2017 is being compared to a very soft Q1 2016, Chipotle seems to be on the recovery track. The most significant takeaway of these results is that with a reduction in operating costs, the company is looking at better margins and is on track with its expansion plans.  However, these strong results were impacted by the company’s revelation that it had recently experienced a data breach. Chipotle mentioned that it had noticed “unauthorized activity on the network that supports payment processing for purchases made in its restaurants.” While details of this breach are sparse, the company has been prompt in its response and corrective measures.

Going  Forward

• Chipotle expects to open 195-210 new restaurants in 2017. This is in line with the company’s expansion strategy.
• Comparable restaurant sales are expected to be in high single digits. This is an encouraging sign and shows that its marketing and food safety measures are showing results.
• In Q1 2017, the company witnessed a more than 50% increase in online sales compared to the previous year. Chipotle is looking to revamp its mobile application to match the improvements made to its website. Going forward, it plans to expand its network of delivery providers to fuel growth in the online channel. Chipotle is also looking to introduce catering delivery to more of its restaurants in the second quarter.

For further details on the company See Our Complete Analysis For Chipotle Mexican Grill

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