Chipotle warned us in July that it may revisit pricing increases due to some “low-grade inflation” around its signature products like beef and tortillas. Earlier this month, the company confirmed it has done just that, marking its fourth pricing increase in two years.
The latest increase seems to have put a little wind in its sails. Chipotle reported Q3 results Thursday afternoon, which included a same-store sales increase of 5% and a net sales increase of 11.3%, to $2.47 billion. Chipotle’s Q3 net income was $313.2 million, up from $257.1 million year-over-year.
Further, those price increases haven’t deterred traffic. Far from it. According to executives on the call, transactions were up over 4% on the quarter and those trends accelerated month-to-month and have continued into October. Placer.ai data shows visits to the chain in September were up 4.7% over September 2022. This is compared to the overall industry, which experienced a 4.2% decline in traffic in September.
“We do love the fact that our growth is being driven by transactions,” CEO Brian Niccol said during the call. “It’s really important to the ongoing health to our business and an opportunity to grow going forward.”
He cited improvement in staffing, training, and throughput for driving higher traffic. The improvements in throughput are coming from Chipotle’s Project Square One, first introduced last year to focus on the basics of operational execution and increased staffing levels.
“Our operators have done a terrific job of getting back to the basics of staffing, training, deploying, holding ourselves accountable to having great throughput. We’re seeing improvements in our throughput and that’s why we’re seeing good traffic,” Niccol said. “That protects the value proposition we have, and I think we’ll get rewarded with more than our fair share of transactions.”
That’s not to say the consumer isn’t feeling pressure, in fact quite the opposite as evidenced by broader traffic trends impacting the industry. CFO Jack Hartung noted, however, that Chipotle continues to do well across all income levels and cites the company’s value proposition for appealing to a broad demographic.
“We still have that value where we haven’t raised prices in over a year until our latest action,” he said.
That “latest action” was 3% in mid-October to offset continued inflation. It also seems to be contributing to margins; restaurant-level margins in Q3 were 26.3%, an increase of about 100 basis points year-over-year. Executives are targeting 27% and $3 million average unit volumes, though Hartung said the company won’t continue to take pricing to get there. He also cautioned that the fourth quarter is “typically a lower margin quarter for us.”
One of the margin drivers is the improved throughput, particularly on the digital makeline. Digital orders tend to yield higher margins because “it’s more efficient,” according to Hartung. In Q3, restaurants that found the right labor cadence with their digital makelines and frontline generated a 4-to-5-entrée improvement during a peak, 15-minute period. Hartung said that additional flowthrough can add 2-to-3% comps. Executives touched on the potential to improve this throughput even more, especially as the company tests technology like the Hyphen automated makeline and the “Autocado.”
Chipotle is leveraging its momentum to continue growing its footprint, adding 62 new restaurants during the quarter; 54 of which were Chipotlanes. Niccol said the company is on track to reach 255-to-285 new restaurants this year, “which will mark a new record for the company.”
Next year, the company anticipates adding 285-to-315 new restaurants, with at least 80% of them in the Chipotlane model. The company expects to get close to 10% openings by 2025, despite continued permitting and inspection delays, utility delays, and rising interest rates.
“As timelines have been extending, our pipeline just keeps getting bigger,” Hartung said.
Contact Alicia Kelso at [email protected]
