Chipotle stock drops after 3Q profit, sales miss

Chipotle Mexican Grill reported on Thursday a nearly 20-percent increase in profit for the third quarter, despite increasing signs that consumers are cutting back.

For the quarter ended Sept. 30, Chipotle reported net income of $72.3 million, or $2.27 per share, an increase of 19.6 percent over earnings of $60.4 million, or $1.90 per share, in the prior year.

The results, however, were lower than expected, sending the stock price tumbling in after-hours trading Thursday. By midday Friday, Chipotle’s stock price fell more than 15 percent after opening at $251.95, well below the 52-week range of $277 to $442.

Though the company is on track to meet its expected guidance of mid-single-digit increases in same-store sales for the year, company officials gave a more conservative projection for 2013 of flat to low-single-digit increases, saying commodity inflation —particularly dairy and meat — could have a negative impact. They also noted that the chain faces tough comparisons with last year, when same-store sales were boosted by warm winter weather.

Dispelling Taco Bell comparisons

During a call to discuss the quarterly results Chipotle officials also took on analysts and stock watchers who have said Taco Bell is stealing market share with its new Cantina Bell menu.

Taco Bell parent Yum! Brands Inc. last week reported a same-store sales increase of 7 percent for that brand, crediting both the Cantina Bell menu and the earlier introduction of the Doritos Locos Tacos line.

Though Taco Bell was never mentioned specifically, Jack Hartung, Chipotle’s chief financial officer, said a competitor did a lot of “very, very heavy advertising intended to attract our customers.”

Still, Chipotle’s transaction trends in the third quarter were the same as the second quarter, before that marketing push started. “So we’re not seeing any kind of loss whatsoever in our transactions moving from us to any other competitor,” he said.

Steve Ells, Chipotle’s co-chief executive, added that the chain has had many imitators over the years, but none have Chipotle’s commitment to food quality. He cited “a recent competitor” that offered something that looked like a Chipotle menu item with grilled chicken. “Yet that company did not have a grill, nor do they have knives or cutting boards, so how do they make grilled chicken and chop it up?”

In the end, said Ells, “Be careful of those who have a lower-cost opportunity. The customers are not easily fooled.”

Inflation to dictate pricing, menu moves

Though the company is not currently planning any menu price increases, officials said they were open to the idea, depending on how the expected inflationary climate plays out next year.

During the third quarter, food costs were lower than expected, in part because lower prices for avocado and cheese offset rising prices for chicken, steak and rice. Chipotle is expecting food inflation in the low-single digits in the fourth quarter and increases in the mid-single digits in 2013, primarily because of higher dairy and meat prices.

“Should that kind of inflation materialize, we will consider a price increase to help offset the impact,” said Hartung. “The timing of any price increase will take into account a number of factors, including the actual realized food inflation, our transaction trends, general consumer confidence and spending trends, and the competitive response from inflation. In this still uncertain economic environment, we’ll be patient and thoughtful about the timing and magnitude of any price increase.”

When asked whether Chipotle is looking at traffic drivers, such as adding new menu items or launching breakfast, Ells said, “None of these things are off the table.”

However, he noted, customers tend to order the same thing over and over. “I don’t think customers are necessarily looking for a radically new menu item,” he said.

Other menu developments include expanding the use of sunflower oil made without genetically modified organisms, or GMOs. The company is also testing a GMO-free rice bran oil, which Ells said may eventually allow the chain to replace the soybean oil currently used.

Though in the past, Chipotle has not included GMO-free products among its goals for ingredients, Ells said, “the subject of GMOs is becoming a bigger part of the conversation” on food, in part because a proposition in California may soon require the disclosure of GMOs on food labels.

In addition, Chipotle said its restaurants this year have used 14.5 million pounds of produce from local farms, exceeding the chain’s goal of 10 million pounds.

Same-store sales miss projections

Same-store sales rose 4.8 percent for the quarter on revenues of $700.7 million, an 18-percent increase over the prior year. However, that disappointed analysts, who had projected a same-store sales increase of 5.4 percent, according to Thomson Reuters.

The 4.8-percent same-store sales increase was largely driven by traffic, though about 1.2 percent was attributed to menu price increases taken earlier in the year on the West Coast.

Chipotle has also continued to sharpen its throughput, adding about four more transactions during peak lunch periods, but there is still room for improvement, officials said.

Hartung said the average check was lower than expected because of fewer drinks sold and a decline in the mix of larger mobile, online and fax orders, which he blamed on a “more cautious consumer.”

Hartung also warned that the fourth quarter would bring difficult comparisons, saying unseasonably warm weather last year boosted same-store sales.

At the end of the fourth quarter Chipotle had 1,350 locations in the U.S. and Europe. The company is on track to open 165 new restaurants before the end of this year, including the first in Vancouver, Canada. Another 165 to 180 openings are planned for 2013, including the first in Germany.

In addition, Chipotle said response to the new ShopHouse Southeast Asian Kitchen concept in the Washington, D.C. area has been strong, and the company is ready to bring it to a new market. A ShopHouse is scheduled to open in Santa Monica, Calif., in the first half of 2013, Ells said, which would be the third location. A second location of ShopHouse is currently under construction in Washington.

Contact Lisa Jennings at [email protected].
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