Chipotle Earnings Preview: Rising Costs and Employee Shortages to Hamper Growth in Q4

Chipotle Mexican Grill (NYSE: CMG) is scheduled to report fiscal 2021 fourth-quarter results on Feb. 8. Since the onset of the pandemic, the company has done an excellent job of adapting to changing consumer habits.

As a result, its sales increased in 2020 despite Chipotle having to close its restaurants for in-person dining temporarily. As economies reopen, the fast-casual restaurant chain is grappling with new challenges like rising costs and employee shortages.

A burrito and chips on a plate.

Image source: Getty Images.

Customers can't get enough of Chipotle, but can it satisfy their appetite?

Fortunately, customer demand remains robust for Chipotle. In its most recent quarter, ended Sept. 30, comparable restaurant sales increased by 15.1% from the same time the year before. Note comparable restaurant sales represent revenue from locations open for at least a full 13 calendar months. This measurement intends to remove the impacts from restaurant openings and closings.

At the onset of the pandemic, Chipotle acted quickly to offer a robust suite of options for customers newly unable to dine in its restaurants. Folks could still enjoy Chipotle by ordering through its website and picking it up in person or having it delivered. Management also partnered with third-party services like DoorDash and Uber, creating another channel where customers could enjoy Chipotle's menu items.

Even as economies are reopening and people can dine inside its locations, digital sales remain robust for Chipotle. In its most recent quarter, digital sales increased by 8.6% and consisted of 42.8% of overall sales. Interestingly, more than half of all digital sales were orders made online to pick up in person. This is the most profitable type of transaction for Chipotle. Online orders free up staff to make the food instead of taking a customer order and processing the payment.

Relieving pressure on staff and increasing productivity per employee is becoming especially vital now that the economy faces broad labor shortages. On-the-job health risks are exponentially higher than before the pandemic, while employee wages are up incrementally. It's no surprise that fewer people are willing to take these jobs. In the company's Q3 earnings press release, management stated confidence overcoming these challenges in the near term to sustain momentum through the fourth quarter: "For Q4, while uncertainty remains on several fronts including the potential impact of COVID-19 as well as inflationary and staffing pressures, we're encouraged by our strong underlying business momentum, and if this trend continues, we expect our comparable restaurant sales to be in the low to the mid-double-digits range."

Still, growth could have been better without the shortages. Not only is Chipotle diligently working to sufficiently staff existing locations, but it also has ambitions to add new restaurants at a pace of 200 per year. It will be interesting to hear management discuss the impact on the rate of new store growth from labor shortages.

What this could mean for Chipotle investors

Analysts on Wall Street expect Chipotle to report revenue of $1.96 billion and earnings per share of $5.29. If it meets those projections, there would be increases of 22% and 52%, respectively, from the same period the year before.

Chipotle's stock is down almost 20% year to date in 2022, perhaps due to shortages of materials and labor. The company has already implemented wage increases and menu price increases. If management reports labor shortages persisting despite these raises, further increases may be necessary to attract sufficient staff. Either that or the company must lower ambitions for new store growth in the near term.

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Parkev Tatevosian owns Chipotle Mexican Grill and Uber Technologies. The Motley Fool owns and recommends Chipotle Mexican Grill and DoorDash, Inc. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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