Operations

Chipotle CEO reveals 5 strategies to combat Q4 earnings miss

Growth in digital sales was the highlight of the quarter, growing 177.2% and accounting for 49% of sales.

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February 3, 2021 by Cherryh Cansler — Editor, FastCasual.com

Although Chipotle's Q4 earnings fell short of the $3.73 per share that analysts had expected — earning $99.3 million or $3.48 per share — it performed better than last year at this time when it hit only $81 million. Chairman and CEO Brian Niccol said that despite the difficult backdrop, the chain's ability to adapt to the changing needs of guests was a testament to the durability of its business model and the strength of our team members.

"Expanding access and convenience through our digital ecosystem has kept the Chipotle brand relevant and with world-class talent, an inclusive culture, strong business fundamentals and deep financial strength, we are well prepared to emerge even stronger post-COVID," he said during Tuesday's earnings call.

Growth in digital sales was the highlight of the quarter, growing 177.2% and accounting for 49% of sales.

"As you can see from these results, our key strategies continue to resonate with guests and position us to win today, while we create the future," Niccol said. "What really excites me and the entire leadership team is our vision of having more than 6,000 restaurants and expanding AUVs about $2.5 million with margins at or above 25%, all of which is a question of when, not if."

Niccol said there were five keys to the chain's success, including:

1. Making the brand visible, relevant and loved.
   "Whether it was switching our Halloween celebration to an entirely digital offering for the first time, unveiling a new line of Chipotle merchandise ahead of the holiday season or launching real food print, a sustainability impact tracker that shows how Chipotle ingredients are better for the planet, our marketing team did a terrific job consistently enhancing our brand and purpose using the right message with the right vehicle," Niccol said.

   Traditional advertising also remains an important marketing tool for Chipotle, which is why the chain last week announced that it was releasing its first-ever Super Bowl commercial.

2. Utilizing a disciplined approach to creativity and innovation.
   Chipotle will continue to add to the menu, said Niccol, who said customers were happy with the return of Carne Asada and have been excited to try thecilantro-lime cauliflower rice that debuted last month. The chain is also testing quesadillas and smoked brisket.

3. Leveraging digital capabilities to drive productivity and expand access, convenience, and engagement.
   Q4's digital sales growth of 177% proves that its digital investments are paying off.

   "We are not stopping there, we've made our digital channel even more convenient with easy ordering in the Chipotle app and website enhancements such as unlimited customization, contactless delivery and group ordering," Niccol said." As a result, and I mentioned this earlier, full-year digital sales were $2.8 billion representing 46% of total sales and growing 174% year-over-year. What an amazing accomplishment? At this sales rate, our average restaurant delivers a digital AUV of $1.1 million."
   
   Complacency will not set in, according to Niccol, who said he was looking for ways to further enhance the digital ecosystem.
   
   "For example, we just announced a car-side pickup pilot in San Jose as an additional access point for our guests," he said. "In addition, we are opening up more and more Chipotlanes and are in the early stages of testing alternative formats like our first-ever digital-only restaurant outside of West Point."

4. Engaging with customers through its loyalty program.
   Chipotle's rewards program, which added over 10 million members in the last year and has nearly 19.5 million enrolled members, will continue to drive customer engagement.

   "We are focused on strengthening our creative and analytical capabilities by using predictive modeling to ensure that our members feel known and valued as we elevate the relationship with Chipotle," Niccol said.

5. Running restaurants with a strong culture.
   Chipotle workers must stay focused on safety, reliability and excellent food as they adapt to changing needs and ordering patterns through COVID-19.
   
   "This hasn't been easy, especially as the number of COVID cases began to spike and at times impacted our staffing capabilities, but they have been up to the challenge," said Niccol, who said the chain's commitment to caring for its staff inspires them to work hard.
   
   "We offer best-in-class benefits coupled with training, development and promotional opportunities that foster a learning culture for continual growth," he said, calling the chain's turnover rate "relatively stable."

Looking ahead, Niccol said the rollout of vaccines was also giving him the idea that things would soon be more normal.

"I am optimistic that resiliency will prevail as people want to get back together, to share a meal and share some stories," he said. "In the meantime, we're ready to navigate through any potential challenges with world-class talent, an inclusive culture, strong business fundamentals and deep financial strength, we feel well prepared to emerge even stronger post-COVID and continue to serve and delight our guests."

Fourth-quarter highlights, year over year:

• Total revenue increased 11.6% to $1.6 billion.
• Comparable restaurant sales increased 5.7%.
• Digital sales grew 177.2% and accounted for 49.0% of sales.
• Restaurant level operating margin was 19.5%, an increase of 30 bps.
• Diluted earnings per share was $6.69, which included an income tax benefit of $3.77, partially offset by a $0.56 after-tax impact from expenses related to legal, corporate restructuring, and certain other costs, a 162.4% increase from $2.55. Adjusted diluted earnings per share excluding these charges and the income tax benefit was $3.48, a 21.7% increase from $2.86.
• Opened 61 restaurants including two relocations, and closed one.

Full-year 2020 highlights, year over year:

• Total revenue increased 7.1% to $6 billion.
• Comparable restaurant sales increased 1.8%.
• Digital sales grew 174.1% and accounted for 46.2% of sales.
• Restaurant-level operating margin was 17.4%, a decrease of 310 bps.
• Diluted earnings per share was $12.52, which included an income tax benefit of $3.79, partially offset by a $2.00 after-tax impact from expenses related to legal, corporate restructuring, restaurant closure costs, and certain other costs, a 1.1% increase from $12.38. Adjusted diluted earnings per share excluding these charges and the income tax benefit was $10.73, a 23.6% decrease from $14.05.
• Opened 161 restaurants including six relocations and closed nine.

Given the uncertainty surrounding the future impact of COVID-19 on the broader US economy, Niccol said Chipotle was not providing fiscal 2021 comparable restaurant sales growth guidance but expects to open 200 units this year.

About Cherryh Cansler

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Cherryh Cansler is VP of Events for Networld Media Group and publisher of FastCasual.com. She has been covering the restaurant industry since 2012. Her byline has appeared in Forbes, The Kansas City Star and American Fitness magazine, among many others.

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