Chipotle Mexican Grill, Inc. Returns to Growth: Key Earnings Takeaways

After taking multiple stumbles backwards over the past year-and-change,Chipotle Mexican Grill, Inc.(NYSE: CMG) looks like it may have taken a tentative step forward. The company reported its fourth-quarter results on February 2. While there was some bad news -- same-store sales were down 4.8% and profits fell sharply from the year-ago quarter -- there was also a strong indication that the burrito seller's worst days are behind it, with comps turning positive in December and staying strong in January.

Fresh, fast, and simple food prepared quickly has been Chipotle's hallmark and remains its focus. Image source: Chipotle.

Let's take a closer look at the financial and operating results, as well as what management says to expect going forward.

Here's how Chipotle did in 2016

Full-year financial results:

Metric 2016 2015 Year-Over-Year Change
Revenue $3,904.4 $4,501.2 (13.3%)
Net income $22.9 $475.6 (95.2%)
Earnings per share $0.77 $15.10 (94.9%)

Revenue and net income in millions. Source: Chipotle Mexican Grill.

Fourth-quarter results:

Metric Q4 2016 Q4 2015 Year-Over-Year Change
Revenue $1,034.6 $997.5 3.7%
Net income $16.0 $67.9 (76.5%)
Earnings per share $0.55 $2.17 (74.7%)

Revenue and net income in millions. Source: Chipotle Mexican Grill.

As you can see in the tables above, Chipotle turned one big corner in the fourth quarter, finally growing total sales for the first time in more than a year. However, it's important to understand that new restaurant openings were the only reason this happened. Chipotle opened 240 new locations over the past year while sales at existing locations fell 4.8% in the fourth quarter, as noted earlier.

Customers starting to come back from the low point of E. Coli aftermath

Chipotle didn't really see its biggest falloff in traffic until December 2015, when comps declined 30% and then accelerated with a 36% decline in January 2016. And while traffic is still well below the peak from the year before, customers are starting to come back in greater numbers. On the earnings call, CEO Steve Ells said that the company delivered 14.7% comps growth in December and a preliminary report of 24.6% comps growth in January.

Furthermore, the majority of comps growth is increased traffic. Only 2% of December and January comps was increased check.

Higher costs still a concern, but the biggest answer to this will be bringing customers back

Chipotle's consolidated income statement shows that, as a percentage of revenue, the company continued to spend more on every part of its business, whether it was food and packaging, labor, occupancy, or general and administrative expenses. The primary reason why this has been the case is twofold.

To start, management has been abundantly clear that they believe cutting costs to prop up profits in the short term would be detrimental to the company. For this reason, Chipotle has held pretty firm to staffing levels in its restaurants, increased its spending on training and food safety/preparation, and continued to prioritize the customer experience as the key to driving positive sales and profit growth. Ells said this on the earnings call::

And while it's not 100% clear that the company's investments in people and processes are solely responsible for the recovery in comps that started in December, management remains committed to, to paraphrase something else Ells said on the call, sticking to a few things that Chipotle does really well, specifically, providing a great experience while preparing simple, fresh, and tasty meals for its customers as quickly as possible.

One extra note on comps: CFO John Hartung said that 60 basis points of the December result and 20 basis points of the January result were related to revenue recognized from redemptions of last Summer's "Chiptopia" rewards program, a relatively small number compared to the total comps growth.

Looking ahead

Chipotle is also investing in expanding digital ordering. Management said it will have a new catering and online ordering platform fully rolled out in early February, and that this would drive up labor costs as a percent of sales in the first quarter. The company is also in the early stages of planning for what Ells described as the largest advertising campaign in the company's history, which will begin in April.

Yet even with the steadfast focus on excellent customer service and plans to invest heavily in marketing, management sees potential to become more efficient by simplifying restaurant operations. Management didn't apply a specific financial return on this plan, however, and in the Q&A, it maintained that recapturing lost sales remained the key to driving profitability back up.

Chipotle plans to open 195-210 new restaurants this year, less than the 240 opened in 2016. This is an intentional reduction, as management has been conservative with capital allocation, and will continue to use cash from operations to finance growth, maintaining the current $543 million in cash and liquid investments as a margin of safety.

For the full year, the company outlook is for comps to grow in the high single digits, a number that could prove to be lowball, based on the past two months' results. But at the same time, investors should temper their expectations, as traffic has generally increased over the past several quarters, as time has passed and consumers have forgotten about 2015's food-borne illness events.

If management can continue executing on its customer and food-quality focus, and if the upcoming advertising campaign can help bring Chipotle back to the forefront of more people's minds, we may look back to the end of this past quarter as the time when Chipotle really did start turning things around.

10 stocks we like better than Chipotle Mexican Grill When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Chipotle Mexican Grill wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017

Jason Hall owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.