Chipotle saw demand soar in Q2, with eyes on rising prices and innovation

Chipotle (CMG) released a second quarter earnings report on Tuesday that beat Wall Street expectations, thanks to massive customer returns after COVID-19 restrictions and continued strength in digital sales.

Here’s what the California-based company reported, compared to Wall Street expectations, according to a Bloomberg consensus estimate:

• Returned: $ 1.9 billion vs. $ 1.88 billion expected

• Adj. earnings per share (EPS): $ 7.46 vs. $ 6.54 per share expected

• Same store sales: 31.2% vs 29.8% expected

The restaurant chain has outperformed on all measures, although it faces close scrutiny to raise prices to offset the impact of the labor shortage. Chipotle shares are up 1.5% in after-hours trading in the wake of the report, and 14% since the start of the year.

“We remain confident in our key growth strategies and believe they will help us meet our next goal of $ 3 million in average unit volumes with industry-leading returns on invested capital improving at as we continue to add “Chipotlanes,” ”Brian Niccol, president and CEO said in the release.

“A strong restaurant economy, combined with significant restaurant growth, should allow us to optimize profitability for many years to come,” added Niccol.

Restaurant customers came back with a vengeance, as evidenced by comparable restaurant sales which soared 31.2%; However, digital sales were not affected by this rebound. The growing segment accounted for 48.5% of sales, up 10.5% from a year ago.

This year, the company plans to open around 200 restaurants, making significant progress this quarter with 56 new restaurants including one relocated; 45 of these locations included a “Chipotlane” drive-thru.

It comes as Wall Street is closely monitoring pent-up demand from Chipotle eaters this quarter and the company’s efforts to innovate digitally.

Nicole Miller Regan of Piper Sandler & Co. reiterated Chipotle shares as “overweight” with a price target of $ 2,100 in a note last month, amid optimism over Chipotle’s development pipeline with 200 new locations planned for fiscal year 2021.

The story continues

“While not specifically modeled, we are very encouraged by the ongoing complementation of new base unit development with the creation of next-gen sales / store channels,” Regan said in a note last month. .

Financial impact of an hourly wage of $ 15

Labor availability and higher menu prices are ongoing concerns for both Main Street and Wall Street. In late June, the company increased wages to $ 15 an hour, which was quickly followed by a 4% increase in menu prices. The move comes amid a massive labor shortage that is driving up costs nationwide.

In the company’s forward-looking statements, Chipotle said it plans to keep an eye on “the impact of competition, including from sources outside the restaurant industry,” including “the labor market. increasingly competitive and our ability to attract and retain qualified employees “. and the impact of his recent hourly wage increase.

“We believe the limited prices over the past two years, rising wages and generally rising consumer inflation expectations provide airline coverage, but Chipotle has pretty directly linked the extra price in the fall to resistance to the air. last cycle, ”wrote Wells Fargo’s Jon Tower in a recent note to clients. He remains “overweight” on Chipotle with a target price change of $ 1,780 to $ 1,720.

BTIG chief executive Peter Saleh told Yahoo Finance Live this week that while Chipotle might be the first to raise menu prices, it won’t be the last.

“Although they are the ones who announced it, the rest of the industry is moving in the same direction that we also believe,” Saleh said. “You’re just going to see more and more price increases to compensate for that [raising wages]. There is a pretty serious labor shortage. “

In general, Saleh says that the average menu price increase per year is “around” 2% each year, but expects “this year to be disproportionate” with a potential of 3% or more in the market. Most fast food chains.

However, the analyst remains bullish on the stock, reiterating it as a “Buy” last month with a price target of $ 1,725.

In the second quarter, Chipotle noted that food, beverage and packaging costs accounted for 30.4% of its revenue – a decline of nearly 300 basis points from the second quarter of 2020, but was offset by the ‘benefit of menu price increases, as well as lower beef prices, partially offset by the higher costs associated with new menu items, such as quesadillas, and, to a lesser extent, the costs of l ‘lawyer. ”

Brooke DiPalma is a producer and reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email him at [email protected]. Check out his latest: