Price Hikes And New Stores Help Chipotle Deliver An Earnings Beat

Chipotle Mexican Grill (NYSE: CMG) carried on its strong showing in the second quarter, handily beating consensus estimates for both revenue and earnings. Sales improved 8.3% in the quarter, driven by comparable sales growth of 3.3%, due to price increases, and new restaurant openings. This positive performance aided in the restaurant level margin expansion of 90 basis points. Based on the performance of the company in the first half and the expected showing in the remainder of the year, CMG has raised its full-year comp sales guidance from low single-digits to a low-mid-single-digit comp range.

Although CMG’s stock went up 6% to $472.30 post the second quarter earnings release, it has fallen to $438 as of July 31, as a result of news surfacing of an illness outbreak at one of their restaurants in Ohio. Subsequent to the posting of strong first quarter results and full year guidance, we updated our price estimate for Chipotle Mexican Grill to $416, therefore our new price is still lower than the current market price. We are in the process of updating our model based on the Q2 performance and new sales guidance. The charts have been made using our new, interactive platform. The various driver assumptions can be modified by clicking here for our interactive dashboard on CMG’s Q2 Performance, to gauge their impact on the earnings and price per share metric.

Factors That May Impact Future Performance

1. CEO Change: Brian Niccol joined CMG as its new Chief Executive Officer (CEO), effective from March 5, 2018. Niccol comes from Yum! Brands where he was the CEO of Taco Bell. He was instrumental in implementing a successful turnaround of that business. Niccol comes with strong expertise in digital technologies, restaurant operations, and brand building, and these skills are crucial for Chipotle’s turnaround. During the first quarter earnings call, Niccol mentioned the possibility of expanding to breakfast items, and incorporating drive-thrus, besides increasing the focus on the digital platform.

2. Accelerating Digital Sales: This is the fastest growing part of CMG’s business, with annualized digital sales totaling $0.5 billion, reporting a growth of 33% in the second quarter, and which now represents 10.3% of the total sales of the company. In 2018, CMG intends to accelerate the rollout of its digitally-enabled second make-lines to 1,000 restaurants, from 500 currently. These new lines enable a faster, and a more accurate experience for the digital customers, and allows CMG’s staff to more easily support the higher sales volumes. The company’s ‘Digital Pick Up Shelf’ initiative, which it is testing in 5 stores, not only provides a faster and a more convenient experience for mobile pick up orders, it also serves as an in-store marketing gimmick to raise awareness among its customers that they don’t have to go through the line to pick up their orders.

3. Adding Catering and Delivery: Catering forms roughly 1% of the total sales, and is a largely untapped opportunity for the company. CMG expanded its delivery availability to 1,700 restaurants in the second quarter, and expects to reach 2,000 by the end of the year. The company has noted that mobile and delivery orders are in that $16 to $17 range, while the traditional check is roughly $12. Since the company’s delivery sales continue to grow at a fast pace, CMG intends to expand the number of delivery partners it works with. The company recently shared details of its successful partnership with DoorDash, its largest delivery partner, and stated that Chipotle has seen a 667% increase in weekly delivery orders since initiating the partnership.

4. New Restaurant Openings: CMG opened 34 new restaurants in Q2 and expects to be at the lower end of its 130 to 150 new openings guidance for the full year. Moreover, the company has plans for a similar number of openings for 2019 as well. New restaurant openings can have a significant positive impact on the company’s revenues. Meanwhile, the company is also in the process of closing 55 to 65 underperforming restaurants.

5. Higher Tax Rate: The transformation cost on the restructuring, restaurant closures, and other unusual costs will total between $115 million and $135 million, with most of that amount occurring in 2018. This factor resulted in the Q2 effective tax rate being 33.3%, higher than the 29% expected. Moreover, it will continue to impact the company for the remainder of the year, with Q3 and Q4 tax rates expected to be 30.3% and 43%, respectively.

See Our Complete Analysis For Chipotle Mexican Grill

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Research

Like our charts? Explore example interactive dashboards and create your own.