On Thursday Chipotle Mexican Grill (NYSE: CMG) reported that adjusted earnings per share reached $ 2.16 in the last quarter, an increase of more than 60% over the prior year , Analyst estimates were exceeded by $ 0.16.
However, investors were not sure what to expect from the fast-casual chain's results, as Chipotle was just under analyst estimates for revenue growth and sales growth at comparable restaurants. Bears believes that Chipotle's current revenue growth reflects only simple comparisons over the previous year, and soon expires. However, there is growing evidence that Chipotle continues to see strong earnings growth for the foreseeable future.
Another Step Towards Recovery
Chipotle Mexican Grill's revenue for the third quarter was $ 1
Higher menu prices led to further earnings growth at Chipotle. The operating margin at the restaurant level reached 18.7% in the last quarter (compared to 16.1% in the previous year), mainly due to lower food costs relative to sales.
In Chipotle's other operating expenses, there was a lot of "noise" due to the restructuring costs of closing down dozens of under-performing restaurants this year and relocating to California. Excluding all these factors, adjusted net income increased 60% to $ 60.7 million, despite the $ 10.6 million cost of Chipotle's biennial managerial conference. EPS picks up slightly due to share buy-backs
Traffic is moving steadily in the right direction
The only downside to Chipotle's third-quarter revenue development was comparable restaurant traffic, which declined 1.1%. Revenue growth of 4.4% was more than explained by higher menu prices, and people spent extra to add something to their orders. Chipotle can not count on increasing prices every year, and without a return to traffic growth, its revenue growth will not continue.
However, traffic trends are gradually improving. Traffic decreased by 2.6% in the first half of 2018, including a decline of 1.8% in the second quarter.
Chipotle's performance early in the fourth quarter suggests further improvements. According to CFO Jack Hartung, Comp sales rose 4% in October, driven by the company's most recent marketing campaign. At first glance, this growth does not seem very impressive. But Chipotle has completed the nationwide rollout of queso last September. Thus, it achieves comparable growth in comp sales, with transaction prices having less tailwind. This indicates that the traffic trends will improve again in the fourth quarter.
The Food Safety Threat Is Coming Back
Another encouraging sign in Chipotle's third-quarter earnings report was that the recent malfunction of the food chain has little impact on their results. More than 600 people became ill at the end of July in a Chipotle restaurant in Powell, Ohio, due to the bacterium Clostridium perfringens, which is a common cause of foodborne illness when stored at unsafe temperatures.
Since late-2015 E. coli outbreak, Chipotle has been adversely affected by even minor food safety concerns. Any negative headline seemed to be causing a month-long slowdown in traffic.
Obviously, Chipotle should aim to have a perfect food safety record. But mistakes happen. The sequential improvement in comparable restaurant traffic in the last quarter, given a widely reported food safety problem, is a good sign that customers have awarded Chipotle for its past mistakes.
Chipotle is just beginning
Finally, Chipotle has achieved its recent improvement in sales and sales sales without much benefit from the multitude of promotional initiatives underway. New CEO Brian Niccol has implemented a rigorous process of testing and refining new programs before he broadens them to ensure their success. In practice, this means that none of its key strategies has had a significant impact on the third quarter. (Niccol joined the company in March.)
But help is on the way. Chipotle launched its latest advertising campaign at the end of September (underlining its commitment to "real" ingredients). It also began to manage several new menu items and promotions in selected markets in the last quarter. Chipotle, in particular, began testing its new loyalty program in three cities a few weeks ago.
As these and other revenue growth initiatives are perfected across the enterprise, customer traffic from Chipotle is expected to improve dramatically. That would be the basis for a sustainable turnaround.