Chipotle (NYSE:CMG), the Mexican fast food joint, reported impressive Q1 numbers driven by a 12.4% increase in comparable restaurant sales. Comparable restaurant sales growth was primarily driven by increased traffic in the quarter. Chipotle was spun out of McDonald’s in 2006 and competes with restaurants in the fast food industry including McDonald’s (NYSE:MCD), Burger King, Yum Brands! (NYSE:YUM) and Papa John’s (NASDAQ:PZZA).
We currently maintain a $273 price estimate for Chipotle’s stock, which is in line with the current market price.
Chipotle’s revenue for the quarter increased by 24.3% to $509.4 million. During the quarter, Chipotle opened 12 new restaurants bringing the total store count to 1,095. It expects to open 135-145 new restaurants this year.
Increasing Food Costs
Rising inflation is eating into the margins of food companies. McDonald’s also warned of an increase in food costs between 4% and 4.5% in the United States and Europe this year. For this quarter, Chipotle reported restaurant level operating margin of 25.2% in the quarter, a decrease of 90 basis points over the prior year period. The decrease was primarily driven by increased food costs and increased promotional spending.
We believe a further increase in food costs would adversely affect Chipotle’s margins. Passing on the increased prices to customers might induce lower visitor count or decrease in average spend per customer visit.