Chipotle Rebounds After Q4’16 Results; Costs Will Continue To Grow In 2017
Releasing its fourth quarter earnings on 2nd February 2017, Chipotle Mexican Grill (NYSE: CMG) reported a rise in its revenues. However, the company missed the consensus estimate for not only revenue but also earnings. This indicates that despite easy comparables, which allowed Chipotle to report a rise in its revenues, the company was unable to find enough traction to be able to meet analysts’ estimates. Having said that, the company’s stock price was seen on an upward trajectory, likely due to the improving sentiment around the brand and steadily rising comps.
As mentioned before, Chipotle’s revenues increased 3.7% y-o-y, mainly due to lapping of softer comparbles in the December quarter. This growth in topline was also supported by 72 new store openings in Q4’16. However, the comparable sales continued to decline at -4.8%, albeit at the slowest pace in the last five quarters. The improving comparables are attributable to the 14.7% rise in comparables in December 2016, and the company’s ability to maintain its average check size, even as it sees the number of transactions fall.
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In terms of bottom line, operating costs continued their uptrend, rising approximately 12% y-o-y. Even as a percentage of revenue, operating expenses continued to be higher, due to heavy spending on advertising and marketing campaigns, higher prices of raw materials such as avocado, and the implementation costs of the food safety program. Furthermore, Chipotle has resorted to television marketing and hired a new ad agency for the same, ramping its marketing spend. Consequently, the company’s margins suffered a significant decline and the earnings per share were hit.
Going Forward
- Chipotle expects to open up approximately 200 new restaurants, and improve its margins to the high single digits. In line with its guidance for 2017, the company reported a 24.6% y-o-y rise in January comps. As seen, it will be relatively easy for the company to grow its comparables due to the plunge seen in the same period the previous year. However, it remains to be seen if Chipotle will be able to attract more traffic.
- The costs are expected to maintain their upwards momentum. In 2017, Chipotle expects labor wage inflation to be around 4% to 5% resulting in an increase of 1 percentage point to labor costs versus the full-year 2016.
- Heading into 2017, the company is targeting an overall combined marketing and promotional investment of around 3% of sales. This may further go up, depending on how the results turn out.
- Furthermore, in order to align its employees towards the goal of delivering an excellent guest experience, Chipotle is rolling out a new compensation system for its restaurant managers, restaurateurs, and field leaders, designed to reward those leaders who are delivering the best customer experience on a sustainable basis. This could be a great step for the company as it tries to woo back customers.
- Like its peers, it is also taking a step towards getting digitally connected. Chipotle has redesigned and simplified its online ordering site, enabling online payment for catering, and integrating with several well-known third-party providers for delivery. This is expected to result in smarter pickup times for the company by cutting the average wait time in half for the customers.
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