Strong sales, buoyed by higher traffic, helped Chipotle Mexican
) post a strong set of third quarter numbers. Total revenues for
the quarter rose 18.0% to $826.9 million while the operating
income surged 17% to $137.1 million. Chipotle's net income jumped
to $83.4 million, or $2.66 per share, up from $2.27 per share in
the previous year quarter. Shares of the company were up 8% in
the post market trading.
We have revised our price estimate for Chipotle to
following the third quarter earnings release.
Same-Store Sales Better Than Expected
Investors were surprised by the company's third same-store sales
growth of 6.2%. Sales were boosted by higher traffic. The results
highlight how the company's efforts to lure more customers through
new menu additions and increased marketing are paying
off. After a disappointing 1% rise in the same-store sales in
the first quarter, the figure accelerated to 5.5% in the second
The restaurant chain added a new tofu like product called
'sofritas' to its menu. At present, approximately 25% of the
restaurants serve this product but the figure should increase to
40% by the year end. Chipotle's bet on introducing an unusual
vegetarian item seems to be paying off as it already accounts for
4% of the sales at the restaurants at which it is served. ((
CMG Earnings Transcript
)) The menu item attracts a lot of vegetarians thereby increasing
the company's customer base. Moreover, the item goes well with the
restaurant chain's image of serving food better and healthier than
that offered by traditional fast food chains.
Store sales were also boosted by the catering services initiated
by the company at the start of the year. Catering service is
offered at select restaurants currently but the company will roll
out the services to all the U.S. restaurants from October end. For
a service that started out this year, Chipotle has done well to
expand the program to all the U.S. restaurants within ten months.
According to the management, catering sales are close to 1% of the
sales at the restaurants at which this service is offered. With the
proportion of restaurants offering catering rising we can expect
the catering sales to make a positive impact on the company's
earnings in the future.
After sales slowed down last year, Chipotle's management decided
to raise the expenses on marketing such as billboards and radio
ads. For the full year, Chipotle expects the marketing costs to
account for around 1.6% of revenues, up from the previous year's
figure of 1.3%.
Comparable sales, or same-store 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
Higher Cost Of Raw Materials Dent Margins
In the latest quarter, Chipotle's cost of food, beverage and
packaging stood at 33.6% of the revenues, up 100 basis points over
the previous year's figure. Chipotle has been reluctant to pass off
the higher costs of food materials to customers. At the start of
the year, it intended to raise the menu prices beginning from the
summer but has since decided to push these price hikes to the start
of next year.
Other fixed costs such as labor, occupancy and other operating
expenses (as a percentage of sales) remained relatively stable. Due
to higher costs of raw materials, the restaurant level operating
margins declined 60 basis points to 26.8%. The margins should
continue to face downward pressure in the fourth quarter as well.
Once the price hikes get implemented at the start of 2014, we could
see some margin relief.
Store Addition To Continue Into 2014
Chipotle stuck to its previous guidance of adding 165-180 new
restaurants in 2013. In the third quarter, the company opened 37
new stores to take the year-to-date tally to 129 stores. As of
September 30, 2013, Chipotle has 1,539 restaurants globally, most
of which are located in the U.S. Chipotle clearly sees a strong
potential to increase store count and intends to open 180-195
stores in 2014.
The company also opened the third outlet of its Chinese cuisine
ShopHouse Kitchen in the third quarter with another one coming up
soon in Santa Monica. The management is still in the testing phase
of the restaurant; it plans to build the brand slowly. The company
hasn't given a concrete number but it certainly looks like the new
ShopHouse stores will constitute only a tiny fraction of the total
openings in the near future.
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