If there's one thing officials at Chipotle Mexican Grill want
you to know, it's that it is not like other restaurant
Sure,Chipotle 's (
) fast-casual Mexican eateries prepare food in kitchens and serve
it to guests who pay money for the privilege, just like at other
And yes, business tends to pick up around lunch and dinner,
when folks queue up to order the company's freshly prepared
burritos, tacos and salads.
And yes, Chipotle needs to keep food, labor and other costs in
line if it wants to hit its margins and deliver the kind of
profits that make investors tingle with joy.
But that's where the similarities end -- at least from
Chipotle's point of view.
"Our business is pretty different than others in the category
in that we don't rely on some of the things others depend on,
such as limited-time offers, merchandise ties and new menu
items," said Chris Arnold, the company's communications
No Smoke And Mirrors
Chipotle doesn't depend on "gimmicks" to drive customers
through its doors, Arnold says. Instead, it relies on the
company's "food culture and people culture."
On the food side, Chipotle focuses on "finding the best
ingredients we can and preparing them using classic cooking
techniques," Arnold told IBD.
On the people side, the company looks to hire the right
workers and develop them into managers.
Ninety-eight percent of Chipotle's managers are hired
internally from the company's rank-and-file crew, Arnold says.
Last year it promoted more than 9,000 people into management
"This leads to a better customer-service experience and more
operational efficiency," Arnold said.
It's hard to argue with the results. Chipotle almost always
churns out double-digit sales and profit growth and consistently
ranks among the top stocks in the restaurant sector.
Its financial might was on display during the second quarter,
which Chipotle reported after the close on July 21.
The company stomped all over earnings and sales estimates
despite implementing its first price increase in three years to
help cover higher food costs.
The next day, Chipotle's stock price soared nearly 12% to
659.77 for the biggest single-day gain since last fall. Shares
currently trade near 678.
Chipotle logged earnings of $3.50 a share for the quarter, up
24% from the prior year and well ahead of estimates for $3.08 a
Overall sales gained 29% to $1.05 billion, beating views for
$989.55 million. It was the third straight quarter of accelerated
Same-store sales climbed 17.3% vs. expectations for a 10.5%
gain. Chipotle also raised its full-year same-store sales
guidance to the midteens from its prior guidance of growth in the
high single digits.
"It's the best traffic number in the industry," Sterne Agee
analyst Lynne Collier said after the earnings report. "Rarely do
you see numbers this high. Most of the companies we follow have
recently put up flattish to slightly negative traffic
In a report, Citigroup analyst Gregory Badishkanian said there
was "no single driver" of Chipotle's strong same-store sales
performance, though he did point to a few key drivers.
One was a bigger (though still small) contribution from
Chipotle's catering business. It represented 1.6% of sales during
the second quarter, up from 0.3% the prior year.
Badishkanian also says Chipotle benefited from improved
marketing during the quarter.
Compared with other restaurant operators in the fast-casual
and fast-food sectors, Chipotle doesn't spend a whole lot of
money on marketing. While most companies spend 3% to 5% of their
revenue on advertising, Chipotle spends 1.75%, Arnold says.
"We are not pursuing the kinds of gimmicks that fast-food
companies pursue, such as new products," he said. "Those are very
expensive; a lot of R&D goes into developing new menu items,
then you have to spend a lot of money on marketing."
Instead, Chipotle focuses on non-traditional marketing efforts
that range from producing Web videos and sponsoring food and
music festivals to partnering with local farmer's markets.
While marketing helps drive top-line growth, Chipotle looked
to bolster its bottom line with a rare price increase during the
second quarter to help offset rising costs of beef, avocados and
"We generally try to hold the line on pricing and raise prices
as a last resort," Arnold said. "We just felt like we had to do
Badishkanian, who recently met with Chipotle management, noted
after the meeting that the company is not seeing "any impact"
from raising prices, and added that Chipotle still feels that its
prices are too low in the Northeast.
One reason customers aren't terribly concerned about the
higher prices is they are confident in the quality and freshness
of Chipotle's food, analysts say. That holds true not just for
Chipotle, but also for other fast-casual chains such asPanera
), Qdoba Mexican Grill -- a division ofJack in the Box (
) -- and Baja Fresh, according to a recent report from analysts
at research firm Trefis.
Top Of The Line
Fast-casual restaurants provide more "freshly prepared and
high-quality food than traditional quick-service restaurants
(QSR), all in an upscale and inviting ambiance with meals ranging
from $8 to $15," Trefis said, adding, "Big QSR brands such
), Subway andStarbucks (
) have been facing a huge threat by the leading fast-casual
restaurants, as the traffic growth in the latter segment
surpassed that of every other segment for the fifth consecutive
year (in 2013)."
To help meet rising customer demand, Chipotle opened 45 new
restaurants during the second quarter to bring the total to more
than 1,600. That total includes 17 Chipotle restaurants outside
the U.S. and seven ShopHouse Southeast Asian Kitchen
The company also has a stake in one Pizzeria Locale in
In any given year, about 80% of its expansion is in existing
markets, Arnold says.
"We have a pretty good idea of what the returns will be in
those markets," he said.