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Thursday, Chipotle Mexican Grill (NYSE: CMG) reported that adjusted earnings per share reached $ 2.16 last quarter, up more than 60% from a year ago. This also exceeded the average analyst estimate of $ 0.16.
Nevertheless, investors were not sure what to think of the results of the fast food chain, as Chipotle was slightly below analysts' estimates of revenue growth and sales of comparable restaurants. The Bears believe that Chipotle 's current earnings growth only reflects easy comparisons from one year to the next and will soon degrade. Yet, more and more evidence is proving otherwise, indicating that Chipotle could continue to post strong earnings growth for the foreseeable future.
Another step forward in the recovery
Chipotle Mexican Grill's revenues reached $ 1.23 billion in the third quarter, up 8.6% from one year to the next. More than half of this revenue growth is attributable to the 4.4% increase in sales of the burrito chain, itself driven by a 48.3% increase in digital sales, at the moment when orders mobile phones take off.
Rising menu prices led to new earnings growth at Chipotle. Restaurant operating margins reached 18.7% in the last quarter (compared to 16.1% a year earlier), mainly due to lower food costs as a percentage of revenue.
Sales and profits continued to recover at Chipotle in the final quarter. Source of the image: Chipotle Mexican Grill.
Chipotle's other operating expenses caused a lot of "noise" due to restructuring costs related to the closing of dozens of underperforming restaurants this year and the relocation of the California headquarters. Excluding all of these items, adjusted net income jumped 60% to $ 60.7 million, despite costs of $ 10.6 million from the biennial Chipotle executives conference. EPS increased at a slightly higher rate due to the share repurchase activity.
Traffic continues in the right direction
The only negative point in Chipotle's third quarter sales is that same-store traffic decreased by 1.1%. The 4.4% rise in comp sales was more than justified by higher menu prices and additional customer spending to add queso to their orders. Chipotle can not count on a price increase every year. Without a return to traffic growth, sales gains will not last.
However, traffic trends are gradually improving. Traffic decreased 2.6% in the first half of 2018, including a 1.8% decline in the second quarter.
Chipotle's performance at the beginning of the fourth quarter points to further improvements. According to Chief Financial Officer Jack Hartung, sales of compiled products increased about 4% in October, driven by the company's latest marketing campaign. This level of growth may not seem very impressive at first. But Chipotle has now surpassed the national rollout of queso last September. Thus, it generates a similar level of software sales growth, with less tailwind than transaction prices. This suggests that traffic trends should improve again in the fourth quarter.
The threat to food safety fades
Another encouraging sign in Chipotle's third quarter earnings report is that the chain's latest food safety error has had little impact on its results. More than 600 people became ill after eating at a Chipotle restaurant in Powell, Ohio, at the end of July, because of the bacterium Clostridium perfringens, a common cause of food poisoning when the ingredients are left at dangerous temperatures.
Since the end of 2015 E. coli outbreak, Chipotle has been negatively affected by even minor food safety failures. Each negative title seemed to cause a slowdown in traffic for months.
Source of the image: Chipotle Mexican Grill.
Clearly, Chipotle should aim for a perfect record of food security. But mistakes happen. The sequential improvement in same-store restaurant traffic in the last quarter due to a widely reported food safety problem is a good sign that customers have forgiven Chipotle for its previous mistakes.
Chipotle is just starting
Finally, Chipotle achieved its latest improvement in terms of revenue and traffic, without taking full advantage of the multitude of sales promotion initiatives underway. New CEO Brian Niccol has put in place a rigorous process of testing and refining new programs before deploying them on a large scale to ensure their success. In concrete terms, this means that none of its major strategies had a major effect on the third quarter. (Niccol did not join the company until March.)
However, help is on the way. Chipotle launched its latest advertising campaign (which highlights its commitment to "real" ingredients) at the end of September. He also began testing several new menu items and promotions in some markets during the last quarter. In particular, Chipotle began testing its new loyalty program in three cities a few weeks ago.
As these and other revenue growth initiatives are perfected and rolled out across the company, Chipotle's customer traffic is expected to improve significantly. This would lay the foundation for a sustainable recovery.
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