Chipotle Mexican Grill, Inc. Still Has 1 Big Problem It Has Not Fixed – The Motley Fool

Chipotle Mexican Grill, Inc. (NYSE: CMG) reported its third-quarter results on Oct. 25, shedding 8.6% sales growth, with earnings almost doubling from $ 0.69 per share last year to $ 1.36. The burrito, bowl, and pseudo-queso seller (this writer is not a fan) has been reported in the last few months.

This included a big 4.4% increase in same restaurant sales, or comps, at least 13 months. But there's a big catch to this catch-all metric: Rising comps simply mean rising revenue, and that can mask potential problems. When we peel comps into its separate components, the unfortunate conclusion is that Chipotle is not seeing an increase in customers. To the contrary – at best, that is flat metric.

Higher prices and cheaper avocados helped boost profits, but weak traffic continues to persist. Image source: Getty Images.

Let's take a closer look at Chipotle's quarter. The traffic trend has become persistent, but management is taking action to reverse it, and there are plenty of positives that deserve discussion.

Higher prices doing the heavy lifting

Here's how Chipotle did some of the most important metrics.

Revenue and net income in millions. Data source: Chipotle.

As the table above shows, Chipotle enjoyed higher revenues and a greater surge in profits, primarily due to improvements in its restaurant-level costs. Comps increased 4.4%, mainly on higher prices, while working costs. The result was a big surge in restaurant-level operating margin, approaching 19%, even with the impact of a nonrecurring expenses related to restaurant closures, relocations, and other restructuring.

While the company's operating costs are higher, the largest positive driver. On average, prices were up 3.8% versus last year, while avocado costs actually declined from last year, more than offselling slightly higher beef and packaging costs. Furthermore, the average ticket size also increased, helping drive more operating leverage.

Traffic continues to be persistent (but there may be a positive trend)

Let's be clear about this first: Comps growth of 4.4% is a good thing. It's also by far Chipotle's best results in a year. Here are the quarterly comps results over the past eight quarters:

Average restaurant sales in thousands. Data source: Chipotle.

Not only did it deliver its best results since last year's second quarter, but it was one of the best times since the end of 2016, when it was finally started creating some distance following the food-borne illnesses that scared customers in droves .

The catch is that Chipotle 's comps growth in each of the last few months. In the third quarter, Chipotle said it continued to see similar transactions, with this important measure down by 1.1%.

The good news is even with the decline, there was some improvement sequentially. In the second quarter, comp transactions were down 1.8%, and they were "negative" in the first quarter of the year. Based on the fact that they were only up 2.2% in Q1, while they were up to 4.9% that quarter, it was likely that transactions were down 2% or more in the first quarter.

If we look at another metric in the table above – average restaurant sales – there's a positive trend. Not only did it deliver its best comps, but it is also better than that, and it is decidedly trending higher.

This metric is very important, since it is one of the best ways to drive higher profits. Chipotle's industry-leading sales growth is expected to be strong, driving strong incremental profits.

Counting on food innovation

Management said the company will finish 2018 "at the lower end" of its target for 130-150 new locations opened this year, and announced plans to open 140-155 new locations in 2019. This represents a continuation of a less-aggressive expansion plan , after having had more than 200 stores per year for almost a decade.

With nearly 2,500 restaurants at quarter-end, this would be 6% expansion, meaning Chipotle will rely on its in-store initiatives to drive a lot of growth. The company said digital sales increased 48% and represented 11.2% of sales. It also has a second digital make-line in 750 rentals and plans to have them in the end of 2019.

Drive-thru windows are one way Chipotle is hoping to bring back more customers. Image source: Getty Images.

Delivery is also high on the radar. Chipotle added Chipotle app, Brian Niccol said the feature delivery time is under 30 minutes, and this offering is helping to keep customers up to date. customers, too.

Chipotle has also started testing drive-through and pickup service windows. Niccol said that the restaurants involved in the test are generating "far above our national average" sales, and that leveraging the digital make-ready line is a key to this success.

Looking ahead: Chipotle Needs Progress

Chipotle has made steady progress in 2018, and the share price is up almost 70% since Niccol was named CEO in Feburary. Since then, the company has steadily chipped away at some of its legacy problems, but mostly The key to returning to Chipotle's big-profit business.

But investors have been singing this song since the "end" of the food-borne illnesses almost two years ago at this point, but to this point, more customers eat at the average Chipotle restaurant than in 2015.

If the small-but-steady improvements over the past few months continue, however, that trend could be reversed soon – particularly if the company can hit it big with the convenience-boosting benefits of digital orders, delivery, and drive-thru .