Chipotle Mexican Grill (NYSE:CMG) announced impressive first quarter figures on April 17, surpassing expectations. It recorded 13.4% comparable sales growth this quarter, the highest quarterly comparable sales growth in the last eight years. The same-store sales were mainly driven by higher customer traffic, good performance of new restaurants and to an extent by a 2% increase in the average bill. Same-store sales or comparable sales, is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation.
In line with its plans of opening up 180-195 new restaurants this year, Chipotle opened 44 new outlets this quarter, taking its total outlet count to 1,637. Although the company has expanded and now has 10 restaurants in Europe, it is largely focused to grow in the U.S., as it believes the U.S. markets still hold a lot of promise.
We have a $444 price estimate for Chipotle, which is about 15% lower than the current market price.
Chipotle’s management attribute these impressive figures to their strong food and people culture, which have helped them maintain a loyal customer base. The company’s efforts at creating a restaurateur culture and integrating with the community fabric are proving effective in strengthening their bond with their customers. Its approach to reaching out at an individual level to its customers and developing customized programs for them, has and will, continue to help them grow their customer base.
Chipotle’s sales surged mostly due to higher customer traffic. While rival restaurants and chains blamed the weather for struggling sales, Chipotle had an overall negative impact of the weather. Though the outlets recorded low sales on days of extreme winter weather, higher sales on better days compensated for them. The average restaurant sales reached a new peak of $2.23 million and the new restaurants billed in $1.6 million to $1.7 million in this quarter.
Sales were also boosted by Chipotle’s catering service. While it still contributes about 1% to the company’s sales, catering is gaining momentum and is expected to build up in the second quarter with the graduation season coming. The company is also planning to start the service in New York City later this year. Launching the catering service has been a smart decision by the company as it fills a price gap in the catering segment between traditional fast-food (say, McDonald’s) and traditional catering services. We expect these services to further gain traction in the market and to contribute significantly to Chipotle’s sales in the long run.
The success of new menu items like Margaritas and Sofritas also added to the sales. Following the popularity of Sofritas among the vegan, vegetarian and even the customers who are meat-eaters, the company is serving them in nearly 1,000 restaurants now. Sofritas now form about 4% of the entree mix in those restaurants.
Inflationary Pressure Mounting
Although Chipotle had remarkable sales this quarter, its restaurant level operation margin dipped by 40 basis points to 25.9% driven primarily by escalating food costs. The overall margins also declined by 150 basis points to 15%.
Following expectations, the food costs escalated to reach 34.5% of revenue- 150 basis points higher than Q1 2013. There was marked year-over-year rise in price for beef, avocados and cheese. The beef prices are expected to continue soaring, owing to the affect of the two-year drought. Due to low production in California, from where Chipotle sources its avocados. Avocado prices are also expected to rise. Considering the inflation trends, Chipotle estimates its food prices to reach 36% in April itself.
In view of the inflationary pressure building up, Chipotle is planning on increasing its menu prices in the beginning of the third quarter. It is essential for the company to pass on the commodity price rise to the customer to protect its profitability. Chipotle enjoys a loyal customer base, which has been willing to spend extra for quality food prepared with quality ingredients. Moreover, with growing awareness about the ill-affects of industrial agriculture, to some extent boosted by Chipotle’s marketing initiatives, preference for good quality ingredients grown using sustainable agriculture is increasing among the consumers. This is playing in Chipotle’s favor. Chipotle has been seeing increasing sales even during times when its competitors are struggling with flat or marginally rising sales. Hence, considering that inflation is affecting all in the food industry,we don’t expect menu price hikes to have a major impact on Chipotle’s sales in particular.