Chipotle Mexican Grill (NYSE:CMG) announced its Q3 earnings on Thursday which failed to live up to market expectations. Total revenues rose 18.4% to $700.5 million but comparable sales only managed to rise 4.8%; down from 8% in the previous quarter. Part of the reason why the comparable sales slowed down was due to an increased competition, primarily attributable to Taco Bell’s new Cantina Bell menu, launched earlier in the year. 
The company was also cautious on its outlook for the fourth quarter comparable sales because of a difficult comparison over the previous year’s quarter. Margins will also be under pressure in the short term since the company will absorb the higher costs of food and not pass it on to consumers in the fourth quarter.
It is still not clear how much or when Chipotle plans to raise the prices next year. The restaurant chain’s CFO, John R. Hartung, was quoted as saying that the company will be patient with the menu price increases and only implement them in case the food inflation exceeds their expectations and starts to dent the margins. Chipotle added 36 restaurants in the third quarter (and 123 year-to-date) and is on course to meet its target of about 160 new restaurants in 2012.
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Although the results paint a gloomy picture, there were some positives that could be drawn out from the results. Here are a few of them:
a) Improved Margins – In spite of tepid price increases implemented at the start of the year, the company was able to not only sustain but improve the operating margins. The company-reported operating margins expanded 70 basis points to 27.4%. Chipotle continued to gain from lower labor and occupancy costs (as a percentage of revenues) while food/beverage costs remained firm due to limited price hikes.
b) Accelerated Expansion – Chipotle plans to accelerate the store openings to around 165-180 restaurants in 2013 (up from around 160 in 2012). Given Chipotle’s history, the restaurant chain has been able to meet its guidance targets so you would expect the company to carry on the trend and add the specified number of restaurants.
There is still a plenty of scope to expand internationally. As of September 30, 2012, the company had only 10 restaurants outside the U.S. (5 in Toronto, 4 in London and 1 in Paris). The restaurant chain’s focus on sourcing naturally raised meats and vegetables bodes well with the eating culture in Europe. Moreover, the company’s Asian-cuisine venture called ShopHouse Kitchen is still present only at one location. The company will open its second and third outlet in Washington D.C. and Los Angeles respectively in the first half of 2013.
c) Restaurant traffic – Average number of customers visiting a restaurant (open for at least 13 months) rose 4.8% which highlights the popularity Chipotle continues to command. Chipotle has facilitated the usage of fax, internet and iPhones to accept food orders, which helps customers avoid standing in lines, thereby improving the overall customer experience. Still, the company has scope to attract more footfalls per restaurant by extending the timings, especially the breakfast hours during which it currently has a very limited presence.
We have revised Chipotle’s price estimate to $355, which is still significantly higher than the current market price.Notes: