Chipotle salsas higher on solid growth, cost controls

Menu price increases contribute to a spike in the chain's comparable restaurant sales.

By Trefis Feb 8, 2012 2:34PM
Image: Peppers (© imageDJ/Jupiterimages)Chipotle Mexican Grill (CMG) continued on its impressive growth trajectory as it reported strong fourth-quarter financials last week. Revenue for the quarter was up 23.7% to $596.7 million, and net income rose 23.7% to $57.5 million. Revenue growth was driven primarily by new restaurant openings and robust comparable sales growth of 11%.

Chipotle's stock continues to outperform its rivals and has gained more than 10% so far this year. Chipotle competes mostly with quick-service and casual dining restaurant chains like Chili's, McDonald's (MCD), Burger King, Yum Brands (YUM) and Papa John's, among others.

Food costs were 32.2% of revenue in the quarter, compared with 31% for the same period in 2010. These costs have been creeping up on the company and have started to affect profitability. For the first three quarters of 2011, food costs, as a percentage of revenue, increased with each quarter. For Q3, they were 33.1% of total revenue. So why are food costs lower this quarter?

Because of the menu price increases that the company implemented from March to August. Thus it comes as no surprise that food costs declined in Q4 compared with Q3. Once the effect of the menu price increase subsides, we will find the company surviving on thinner margins.

For the full year, food costs were 32.5% of revenue, an increase of 190 basis points compared with 2010. Chipotle expects food inflation to be around 5% for 2012. According to Jack Hartung, Chipotle's chief financial officer, the company doesn't plan to increase menu prices in 2012. Such a move could adversely affect profitability at a time when the EBITDA margins are deteriorating.

Chipotle Restaurants EBITDA Margin

Revenue was partially buoyed by the opening of 67 restaurants during the quarter. For the entire year, Chipotle opened 150 restaurants, including one ShopHouse, to bring the total to 1,230. For 2012, the company estimates 155 to 165 restaurant openings.

Chipotle Number of Restaurants

In the conference call, company officials were quoted as saying that the menu price increases contributed 4.9% to the 11.1% increase in comparable restaurant sales. If Chipotle indeed decides not to raise prices in 2012, it could be hard for the company to post a seventh consecutive quarter of double-digit increases in comparable sales.

We have a $321 price estimate for Chipotle, which is about 10% below the current market price. We are revising our estimates to incorporate Q4 earnings. (See our complete analysis for CMG stock here.)



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