Heard on the call: Chipotle Mexican GrillHeard on the call: Chipotle Mexican Grill

Alan J. Liddle

Chipotle Mexican Grill Inc. said Thursday during its quarterly conference call with investors that it will remain focused on U.S. operations, even while its initial foray into Europe has yielded positive results.

The Denver-based company’s new, smaller and cheaper-to-build “A model” restaurant prototype is bettering initial sales expectations, it said, and offering opportunities to overcome real estate challenges.

The success of the fast-casual chain operator’s “Restaurateur” program has developed stronger restaurant-level managers, the company said. Only real estate issues, particularly the slow down in development of new commercial properties, might constrain the chain’s domestic growth in the near term, company officials said. They added, however, that the flexibility in site selection afforded by the new smaller prototype can help the company overcome such real estate challenges.

“Our A Model strategy is one way that we have modified our real estate strategy to allow for strong growth in the years to come,” Montgomery “Monty” Moran, Chipotle’s co-chief executive, said of the smaller, more energy efficient restaurant style the chain now uses in 10 locations across the three Ohio cities of Dayton, Columbus, Cleveland, as well as in Los Angeles and Sacramento, Calif., Phoenix, Houston, Dallas, Chicago and Minneapolis.

“Opening sales volumes in our 10 A Model locations have been in line with traditional restaurants,” Moran added. “But couple that with lower occupancy costs, lower development costs — less than $700,000 for an A Model as opposed to $850,000 for a traditional restaurant — and a couple of years of modest comp sales increases, and our A Model strategy has the potential to generate cash-on-cash returns of more than 50 percent.”

Those insights were offered to analysts and investors by executives during a conference call that followed the company’s Thursday earnings report that its net income for the second quarter ended June 30 had increased 31.3 percent to $46.5 million, compared with the same prior-year period.

The company’s stock, which closed at $133.16 per share Thursday, climbed 9.3 percent to $145.50 per share Friday, on news of that income growth and a 20.1-percent increase in second-quarter revenue, which totaled $466.8 million. Same-store sales rose 8.7 percent and the company reported a 13-percent increase in the number of restaurant units, to 1,001 locations.

Chipotle chairman, co-chief executive and founder Steve Ells spoke about the operation of the chain’s first European restaurant, which opened during the second quarter in London.

“The food is exceptional. The crew is empowered and already performing very, very well, which gives me great confidence that we're now well on our way to developing the future leaders we will need to expand in London and elsewhere in Europe,” he said in a transcript provided by SeekingAlpha.com. “This focused approach to expansion in Europe is off to a great start, and we remain encouraged about our opportunities.”

Ells said Chipotle is close to signing a lease for a restaurant in France. Still, he said the company’s focus would remain in the United States.

“Our major opportunities are, of course, in the United States, especially considering the success of the ‘Restaurateur’ program, ‘Food With Integrity’ progress and our ability to expand real estate through the A Model,” he said.

Chipotle chief financial officer John Hartung said that while the chain’s same-store sales “held up well throughout the quarter and into July, so far…we do remain concerned about recent reports of softening consumer confidence and the outlook for the economy.”

He added that based on same-store sales trends so far this year, Chipotle was modifying its guidance to forecast full-year same-store sales growth in the mid- to high-single digit range, as opposed to its earlier forecast for growth in the mid-single-digit range.

The chain continues to expect “modest upward pressure on food costs for the remainder of the year,” Hartung also noted.

The company said it expected to open between 120 and 130 units in 2010. About 25 percent of those openings would be A Models.

Hartung said the company has no plans to increase menu prices, noting that “our margins are already very, very, very healthy, and so we’re going to be patient.”

Contact Alan Liddle at [email protected].