What to Watch From Chipotle Mexican Grill's Latest Results

Analysts Notebook wrote a column · Apr 25 07:02

$Chipotle Mexican Grill (CMG.US)$ exceeded analysts' forecasts for its quarterly financial performance, with significant earnings, revenue, and same-store sales growth. Additionally, in March, Chipotle's board sanctioned a 50-for-1 stock split, marking one of the largest stock splits in the history of the New York Stock Exchange.

The stock rose over 3% in pre-market trading.

For its first quarter, revenue grew 14.1% to $2.7 billion, with same-store sales jumping by 7%, higher than estimates of 5.13%. The company also beat expectations on the bottom line, with adjusted earnings per share coming in at $13.37, compared to estimates of $11.66.

Limited-Time Offerings Boost Results

Head of Analytical Research R.J. Hottovy from Placer.ai attributed Chipotle's success to innovative products, increased customer visits, and improved operating margins. He suggested that the positive revenue trend might persist into the next quarter, emphasizing that such performance is relatively rare among restaurant operators currently.

Hottovy praised Chipotle's efficient service model, which attracts consumers despite longer lines, as customers trust the speed of service. He concluded that from a valuation standpoint, Chipotle has considerable growth potential, especially in smaller markets.

What Executives Said During Earnings Call

Despite raising prices, Chipotle has not seen a downturn in customer visits or spending. On the company's earnings call, executives emphasized that the perceived value is what keeps customers coming back.

In the first quarter, Chipotle reported a 7% increase in comparable restaurant sales. This growth was attributed to a combination of a 5.4% rise in transactions and a 1.6% increase in the average amount spent per order. Furthermore, there has been a notable increase in "side attachment," which refers to customers adding extras like additional meats or chips to their orders, as stated by Chipotle's CFO Jack Hartung during the earnings call. These positive results have been achieved even after Chipotle raised its menu prices by 2.8% year over year in October 2023.

Whenquestioned about the demographics of the customers contributing to the increased traffic, whether low-income or high-income, Chipotle's Chairman and CEO Brian Niccol responded that the growth in customer traffic is "really broad based," suggesting that the increase spans across different income levels.

From the low-income consumer to the middle-income to the high-income consumer, we're just seeing gains with all income cohorts," Niccol said. "And when we ask the question — 'Why is that?' — what we hear back from every group is, It's a great value proposition."

Through our marketing initiatives, we continue to find successful ways to drive enrollments, and we are leveraging our digital team to create a seamless app experience and deliver more relevant journeys for our rewards members," Niccol said.

More Restaurants, More Growth

Niccol said the chain is seeing "gains with all income cohorts" on the earnings call.

What we hear back from every group is it's a great value proposition," he added.

In Q1, Chipotle opened 47 new restaurants, with 43 locations featuring its drive-through Chipotlane. This year, it expects to open 285 to 315 new locations, with more than 80% of them having the drive-through concept. Long term, it plans to operate 7,000 restaurants in North America (there are currently 3,500).

For 2024, the company expects sales growth of mid- to high-single digits, up from the previous guidance of mid-single-digit growth. The latest results provide "confidence that we can achieve our long-term target of more than doubling our business in North America and expanding internationally," said Niccol.

Under this reasoning, fast food stocks with high revenue per store will likely see an uplift in their stock prices.