Chipotle Mexican Grill: Revenues Disappoint In Q2 2017, But Profitability Improves
Chipotle Mexican Grill (NYSE: CMG) announced its Q2 2017 results on July 25th and the company delivered better than expected EPS (earnings per share), however the top line did not meet expectations. Comparable sales were significantly better given that Q2 2016 was a slow quarter for the company as it was reeling under the impact of the E. coli virus. While the company is continuing to focus on its food safety measures, it admitted that the recent norovirus break out at one of its restaurants has made it more challenging to restore customer trust. Chipotle has the highest level of food quality standards in place, however execution of these standards in each and every restaurant appears to be challenging, leading to new outbreaks. The company is investing in training its restaurant crew and managers to ensure that execution is seamless and complete.
Below is a summary of the company’s financial performance for Q2 2017:
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The increase in comparable sales in Q2 2017 was driven by a 5.3% increase in paid traffic comps compared to the same period last year. Average ticket size in this quarter increased by 2.3% primarily due to fewer promotions. The comparable sales were impacted negatively by 30-50 basis points due to the data security breach incident at Chipotle.
According to Chipotle, in the markets where it increased prices the overall resistance was less than 20% and most markets did not see any resistance. Based on these results the company is reviewing the next list of restaurants for the next round of price increase. The company’s restaurant level margins have increased to 18.9% in this quarter and are now within striking distance of its target of 20%. Short supply of avocado continues to impact Chipotle’s food costs, masking the savings achieved via reduction of food wastage and lower paper and packaging costs.
Below is a summary of Chipotle’s expenses for Q2 2017
Going Forward:
- The Norovirus event has impacted Chipotle’s comparable sales negatively by 5.5% in the last few weeks. However, the company hopes that this impact will fade over the next few weeks and its new menu launches, especially queso, will drive restaurant traffic. The company’s guidance of high single digit comparable sales stays for 2017 on the back of the positive impact from new menu launches.
- The company will continue to invest in improving the digital experience for its customers. It is optimizing its new restaurant design for digital order pick up and is on track to launch a new mobile app this year.
- Chipotle is stepping up its marketing efforts with television advertising and is working on a television campaign which can drive new traffic to its stores.
We will be updating our model based on these results which might lead to a revision in our price estimate for the company.
For further details on the company See Our Complete Analysis For Chipotle Mexican Grill
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