After reporting yet another stellar quarter, Chipotle Mexican Grill’s stock price dipped Tuesday after executives warned of higher food costs in 2015, and gave a relatively modest projection for sales growth, given tough comparisons ahead.
Despite a nearly 57-percent increase in third-quarter net income, reported Monday, Chipotle’s stock price dipped more than 6 percent in early trading Tuesday, to $611 per share, based on the lower-than-expected outlook.
The Denver-based operator’s results, however, stood in sharp contrast with that of former owner McDonald’s Corp., which reported Tuesday a 30-percent slide in third-quarter earnings, with global same-store sales falling 3.3 percent on declines in traffic.
At Chipotle, same-store sales for the Sept. 30-ended quarter jumped 19.8 percent — the highest increase since Chipotle went public in 2006 — with traffic rising 11.3 percent, despite a 6.3-percent increase in menu prices.
In a call with analysts Monday, Chipotle founder and co-chief executive Steve Ells came down harder than usual on the traditional quick-service sector, saying it has “traded food quality and taste for low cost and ease of preparation. It has aggressively marketed low prices to entice customers to visit more often, which has resulted in the need to reduce cost by cheapening ingredients and by compromising the overall dining experience.”
Ells said Chipotle has demonstrated that “we can spend more on ingredients, not less, and charge a fair price, and, at the same time, generate outstanding business results.”
Though Ells didn’t mention McDonald’s by name, Don Thompson, chief executive of the Oak Brook, Ill.-based quick-service operator, was asked to respond to the critique during his call with analysts Tuesday.
“I would not say that Steve is wrong or right,” Thompson said, according to USA Today. “Each organization has to look at it through the eyes of its customers.”
Chipotle’s customers, meanwhile, appear to like what they see — and are willing to pay more for it.
Chipotle’s menu price increases helped boost average check 8.5 percent during the third quarter.
Chipotle chief financial officer Jack Hartung said the company has seen little price resistance and very little menu trade-down, though he estimated the price hikes dulled the chain’s growth in traffic by about 1 percent.
“We are delighted to see that the price increase we had to take, after three years of absorbing food inflation, had little to no effect on the strong customer loyalty we worked so hard to build,” Hartung said.
The fourth-quarter same-store sales increase of 9.3 percent a year ago will bring more difficult comparisons as the chain wraps up 2014, but Hartung projected full-year same-store sales to be in the mid-teens.
Next year, facing even more difficult comparisons with the stellar performance of 2014, the company offered a tempered projection, saying same-store sales will be in the low- to mid-single-digit range for 2015.
Food costs have stabilized in the second half of 2014, aside from increases in beef, dairy and avocados, Hartung said. Beef and dairy are expected to push food costs in the fourth quarter, though avocado prices are expected to moderate.
In 2015, the company expects food cost inflation in the low single digits, compared with the third quarter. The lingering drought is expected to keep beef prices high, but dairy costs will be lower next year, Hartung said.
The company expects to see some pressure on rents in major markets next year, but those costs will be offset to some degree by moving into smaller retail strip centers in underserved markets like Corpus Christi, Texas, and Greenville, N.C., where the chain opened this year.
Analysts remain bullish
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In reports Tuesday, analysts remained bullish on Chipotle, saying the company’s management is typically conservative with preliminary guidance. If anything, the dip in stock price should be seen as an opportunity for investors to get in on Chipotle’s continued growth, some said.
Stephen Anderson of Miller Tabak + Co., LLC wrote that while a 20-percent same-store sales gain is unlikely to recur, an average same-store sales increase of 10 percent over the next four quarters is still possible. Chipotle is spending more on marketing to maintain its traffic growth, he wrote.
Catering, which accounts for about 1.6 percent of total sales, was unchanged compared with the prior quarter, but the chain continues to roll out its catering program, and is “just getting started with catering as a major top-line driver, as well as a bottom-line catalyst,” he said.
Anderson sees plenty of room for unit growth, saying Chipotle wouldn’t reach nationwide saturation until it hits about 3,100 units, which is not likely before 2021. At the end of the third quarter, Chipotle had 1,724 units, all but 17 in the U.S.
Canada is another growth market for the brand and could support as many as 100 locations, he said.
David Tarantino of Baird Equity Research pointed to Chipotle’s ongoing increases in throughput as an opportunity.
During the third quarter, Chipotle increased by six transactions during peak lunch hours, compared with a year ago, and six transactions during dinner.
“Management’s confidence in its ability to continue to drive same-store sales increases over time via further gains in throughput is based in part on the impressive peak throughput levels for top performing stores, with some stores executing 350-plus transactions during peak lunch hour, or roughly three times the overall store average, which support the view that meaningful opportunity remains across the entire store base,” Tarantino wrote.
Mark Kalinowski, analyst for Janney Capital Markets, has long argued that Chipotle also has an opportunity at breakfast, though management has insisted there are no plans to launch breakfast, except at some airport locations.
In resopnse to concerns about difficult comparisons next year, Kalinowski also pointed to Chipotle’s stellar year in 2006, when same-store sales grew 13.7 percent. In 2007, same-store sales rose again 10.8 percent, with the stock price rising that year an “enviable” 57 percent.
“So this suggests to us that, even though 2014 might end up being a great year for both same-store sales and CMG stock performance, the difficult same-store sales comparisons that could be lapped as 2015 progresses does not necessarily preclude a ‘bad stock year’ for CMG in 2015,” he wrote.
Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout
