Mexican Grill Inc. upgraded its outlook for the year after seeing traffic strengthen in the second quarter, sending the company’s stock prices soaring.
In early trading Friday, the chain’s stock rose 7.16 percent to $403.71, topping the high for the previous 52 weeks of $404.59.
After reporting a 7.6-percent increase in net income for the June 30-ended quarter on Thursday, company officials said in a call with Wall Street analysts that same-store sales started to climb in April after the weather improved. They added that the trend has continued into July.
The chain’s same-store sales rose a modest 1 percent in the first quarter but increased 5.5 percent during the second quarter. An extra trading day in the recent quarter helped, but about 4.5 percent of that increase was attributed to transaction growth.
The Denver-based company now projects same-store sales growth for the year of low-to-mid single digits. Previously, the company said it expected flat to a low-single-digit increase in comps.
Analysts scrambled to adjust their expectations for the chain on Friday, noting Chipotle’s standout performance for the industry.
In a report Friday, Mark Kalinowsky of Janney Capital Markets offered his “tip of the sombrero,” saying, “We were pleased with the 5.5-percent Q2 same-store sales performance in the context of what had been a weaker-than-expected quarter for the chain restaurant industry as a whole.
“The casual-dining sector disappointed. The quick-service burger/sandwich segment disappointed. Other fast-food areas took a turn for the worse during June. Family dining remained sluggish. And yet, through all this, Chipotle exceeded expectations,” he wrote.
Stephen Anderson of Miller Tabak + Co. LLC noted in a report that Chipotle’s second-quarter traffic gains don’t yet show the benefit he expects from the planned closure of 67 underperforming units by competitor Qdoba Mexican Grill, which is expected to be completed by September.
“Many of those closures already occurred by the end of June, mostly in key [Chipotle] markets such as Manhattan, Chicago and Southern California,” Anderson wrote. “We had said the market share–related lift to comps would occur in 4Q13, but based on the earlier-than-expected closures, we think [Chipotle] will realize the 50-basis-point lift to comps as early as 3Q13.”
The cost of 'food with integrity'
Food costs were an issue for Chipotle during the quarter, accounting for 33.1 percent of revenue, an increase of about 100 basis points, or 1 percent, compared with a year ago.
The higher cost of ingredients in salsa, as well as for cheese and chicken was offset somewhat by lower avocado prices, said Jack Hartung, Chipotle’s chief financial officer.
Hartung said the company expects food costs to remain at current levels or go slightly higher. Still, he noted, there are no plans to increase prices for the remainder of 2013.
That’s a delay in part to allow the company to better gauge costs associated with a recently announced plan to remove all genetically modified ingredients from the fast-casual chain’s menu, he said.
Earlier this year, Chipotle announced a plan to label all genetically modified ingredients, and the chain’s founder and co-chief executive Steve Ells has pledged to eventually take the menu completely GMO-free as part of the brand’s focus on “food with integrity.”
“Most consumers don’t understand how pervasive GMO ingredients are in this country in restaurants and supermarkets,” said Ells. “But the fact is that 94 percent of the soybeans and 88 percent of the corn in this country are genetically modified. While there’s not yet a clear scientific consensus on issues related to GMO foods, use of GMO crops has been banned or restricted in a number of other countries, and there’s increasing debate about the issue in the United States.”
Chipotle has already begun a switch to non-GMO sunflower and rice bran oils, and there is more to come, Ells said.
Hartung noted that those non-GMO ingredients may increase food costs, though it’s really too early to tell. “When we do raise prices, we may be able to time that with when we’re doing ‘food with integrity’ items, like removing the rest of the GMOs in some of our ingredients,” Hartung said.
Products, initiatives with potential
During the quarter, Chipotle rolled out its new “sofritas” product, a seasoned braised tofu, to all restaurants in California. Ells said sofritas now accounts for between 4 percent and 5 percent of the product mix.
Catering, which launched in January in Denver, has been expanded to about 200 restaurants in a dozen markets, said Monty Moran, Chipotle’s co-chief executive. Catering is expected to reach all markets by the end of the year.
“Though catering is new to us, it’s off to an excellent start and showing great potential,” Moran said. “Sales are approaching 1 percent of total sales, and we believe the vast majority of that is incremental.”
The chain is also continuing to work on improving throughput, which increased transactions by about 25 per day during the quarter — but Moran said he feels the chain can do better.
Recently Chipotle began including throughput metrics as part of various career-step expectations. Managers will be expected to meet certain metrics for their semi-annual bonus reviews, for example, and restaurants will have specific goals to track their improvements on speed of service.
For the quarter, Chipotle added 44 restaurants, ending with a total of 1,502.