Monthly Notes On The Restaurant Industry: Chipotle Mexican Grill & McDonald’s

The U.S. restaurant industry has been witnessing tough competition among all the segments for its breakfast customer traffic. On the other hand, casual dining restaurants have taken the opportunity to attract the lunch time visitors. According to a recent report by the research group NPD, burgers have been the customers’ top priority for the lunch hours, and casual dining restaurants came out as the leaders in driving customer traffic by reducing the price of its burgers. ^[1] Casual dining chains witnessed a 2% increase in lunch visits over the 12 months period ended June 2015.

The report mentions that the average price of a burger at casual dining restaurants is close to $9 compared to $5.62 in fast casual restaurants. However, casual dining restaurants serve complimentary fries with the burgers, and that is not the case at fast casual restaurants, where the fries need to be purchased separately.

Additionally, the decrease in lending rates from 4.85% to 4.60% by The People’s Bank of China, led to the biggest stock market plunge in China since 1996. As a result, most of the U.S. listed stocks suffered major drops over the last week.

Here are some of the updates related to some of the restaurant companies covered by Trefis:

McDonald’s

The Golden Arches reported negative comparable sales for the fifth consecutive quarter in its second quarter fiscal 2015 earnings report. The company posted revenues of $6.49 billion, beating the street estimates by $40 million. McDonald’s comparable sales in APMEA (Asia/Pacific, Middle East and Africa) region declined by 4.5% in the second quarter, whereas operating income declined 26% year-over-year (y-o-y), as McDonald’s Japan still struggles with low customer traffic. ^[2]

The important takeaway in the earnings report was the positive guidance given by the company for the third quarter, as McDonald’s expects growth in the International Lead market segment, and also expects recovery efforts in Asian markets to increase the customer count.

MCD stock traded close to $100 for the major part of August. However, after the Chinese interest rate cut, the stock declined to $91, before bouncing back to $97. Our price estimate for MCD stock is $99, which is roughly 3% above the current market price.

Chipotle Mexican Grill

Chipotle reported excellent results in its second quarter earnings report, with 14.1% y-o-y growth in the net revenues to $1.2 billion, and 4.3% growth in the comparable sales. (Chipotle Mexican Grill, earnings call transcript)) The highlight of the earnings was the addition of a new pork supplier, Karro Food Group of the U.K., which has already started serving pork to the company’s restaurants in Florida, bringing relief to the restaurants that were facing a Carnitas shortage. ^[3]

CMG stock rose to its all-time high with an approximate 8% jump to $724. For the majority of the month of August, the stock traded above $740, before declining 7% to $695 on the news of Chinese interest rate cuts. The stock is currently trading close to $721. Our price estimate for CMG stock is $727, which is roughly in line with the current market price.

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More Trefis Research

1. Casual dining restaurants increase lunch visits for the first time in five years [↩]
2. McDonald’s, Q2 2015 earnings call transcript [↩]
3. Chipotle adds British pork supplier to ease Carnitas shortage [↩]