News

Chipotle experiences Q2 gains, but stock still drops

July 19, 2011

??Chipotle Mexican Grill Inc. has reported financial results for its second quarter ended June 30, 2011.

Revenue for the quarter was $571.6 million, up 22.4 percent from the prior year period. The growth was the result of new restaurants not in the comparable base and a 10 percent increase in same-store sales. Comp growth was primarily driven by increased traffic in the quarter.

Net income for the second quarter of 2011 was $50.7 million, or $1.59 per diluted share, compared to $46.5 million, or $1.46 per diluted share, in the second quarter of 2010.

Meanwhile, its restaurant-level operating margin dropped 110 basis points to 25.8 percent based on rising food costs.

General and administrative costs were 7.3 percent of revenue, up 80 basis points from the prior year period. The increase was driven by an increase in non-cash stock-based compensation and by higher legal costs brought about by an investigation by U.S. Immigration and Customs Enforcement (ICE).

Results for the quarter also were impacted by the loss off Chipotle’s $2.4 million investment in ANGR Holdings LLC, which operated the restaurants awarded on the television program America’s Next Great Restaurant prior to their closure.

During the quarter Chipotle opened 39 new restaurants, bringing the total restaurant count to 1,131. For the first time, the average unit sales volume for restaurants open at least 12 months passed $1.9 million, said Chipotle CFO Jack Hartung during the Q2 earnings call.

“And our restaurants are opening with the strongest sales ever, which combined with the lower average investment, fueled by the success of our A Model openings, means our new restaurant openings economics are the best that they have ever been,” he said. “Normally, we would expect these results to translate into significant margin expansion and healthy EPS growth, but worse than expected food inflation, along with a number of charges during the quarter, have largely offset our strong revenue performance.”

While the company experienced revenue, same-store sales and profit gains during the quarter, the company’s stock fell 4.5 percent July 19 because it missed analysts’ expectations of $1.68 per share on revenue of $560 million. As of July 20, the company’s stock was being traded at $330 per share, a decrease of 1.1 percent when compared to its weekly high of $333.

The company cites rising food and labor costs as a reason for its earnings disappointment.

“I think what the earnings report that we saw yesterday exhibit’s is that the clear path that Chipotle has isn’t that clear. They will have some blips on the radar here and there,” said R.J. Hottovy, Morningstar’s global director covering consumer cyclical and defensive stocks.

Hartung said some of the costs are clearly one-time charges; however, some of them will recur for a few quarters. “And while food inflation is not temporary, we believe the price increase we recently began to implement will offset most, if not, all the inflation impact on our margins,” he said.

During the Q2 earnings call, Chipotle founder Steve Ells said the company will continue to focus on its mission to serve fresher, better tasting food. To do so, the company is increasing its rollout of brown rice, which is now being served in 140 restaurants.

The company also is in the process of rolling out its first loyalty program, called Farm Team.

“The core of the Farm Team program is an online world that shows the full spectrum of farming, from very industrialized farming to more sustainable methods. Farm team members will have the opportunity to learn where their food comes from and how it is raised, to take quizzes, play games, participate in polls and watch videos to learn about Chipotle's philosophies regarding food that is raised right,” Ells said. “Participants can earn badges and share facts using Facebook and Twitter. As customers make their way through the Farm Team site, to different levels, they earn points, which they can exchange for food and other prizes.”

Initial Farm Team participants will be those invited by restaurant managers and local-store marketing and customer service teams, who will invite the chains most passionate and loyal customers to participate.

Six months ended June 30

Revenue for the first six months of 2011 was $1.08 billion, up 23.3 percent from the prior year period. The growth in revenue was the result of new restaurants not in the comparable base and an 11.1 percent increase in comp sales. Comps growth was primarily driven by increased traffic during the first six months of 2011.

General and administrative costs for the first six months of 2011 were 6.9 percent of revenue, up 50 basis points from the prior year period. The increase as a percent of revenue was primarily driven by an increase in non-cash stock-based compensation.

Net income for the first six months of 2011 was $97.0 million, or $3.06 per diluted share, compared to $84.3 million, or $2.65 per diluted share, in the first six months of 2010.

During the first six months of the year, Chipotle opened 51 new restaurants, bringing the total restaurant count to 1,131.

"We’re pleased that our comps and new restaurant sales have performed well, which is a reflection of the experience our customers enjoy when they visit Chipotle, and which our teams and our people culture are responsible for delivering,” said Chipotle co-CEO Monty Moran. “While we’re working hard to tackle the challenges that arose during this quarter, we’re confident that the stronger our people culture becomes, the better customer experience we will deliver, which will lead to more loyal customers, even stronger sales trends, and better financial results.”

For the full-year 2011, management expects high single- to low double-digit same-store sales growth and the opening of 135-145 new restaurants.