Foodie favoriteChipotle Mexican Grill just reported earnings for the second quarter, and for the most part, it was another strong quarter for the burrito maker. The highlights:
- Earnings per share came in at $4.45, up 27% on strong growth in sales and restaurant-level operating margin, just beating Wall Street estimates.
- Revenue rose 14.1% to $1.2 billion, just shy of the $1.22 billion Wall Street estimate.
- Same-store sales, or comps, increased 4.3%, almost entirely on the last benefits of last year's price increases.
Continue Reading Below
While the overall result was solid, management did identify a few things that investors really need to be aware of going forward. Let's take a closer look at four key takeaways from Chipotle's earnings report and call.
1. Comps were largely driven by price increase; slower growth is likely for the rest of 2015While it's been expected to happen after last year's huge double-digit comps growth nearly every quarter, co-CEO Steve Ells indicated on the earnings call that about 4% of last quarter's 4.3% comps growth was related to the price increase that was responsible for much of 2014's comps growth. In other words, last quarter showed small traffic growth, but management has been consistent with forecasting low-single-digit comps growth moving forward.
The company only recently found a solution to its pork shortage, and it won't be fully resolved for another month or so as the company restocks its supply chain. That will further pressure the company's same-store-sales results for much of the rest of the current quarter.
2. It's a restaurant, so food supply and pricing will always be a concernIf you've followed Chipotle, you're probably aware that last year's price increase for beef items fell well short of covering the company's costs, as beef prices have skyrocketed over the past year. Management also expected that the price increase on its barbacoa and steak items would reduce the mix of this produce, which currently rests at about 30%. That didn't happen. Over the past year, nearly 100 basis points of the company's food costs have been attributed to higher beef prices, while it hasn't netted nearly that much back from last year's price increase.
As a result, the company is going to raise prices on its steak and barbacoa menu items again and has already started doing so in some markets. However, the pork shortage is affecting this price increase, as the company has chosen not to increase beef prices in locations that don't have carnitas yet, until carnitas is back on the menu. In other words, the full benefit of the beef price increases won't work through the chain for at least another several weeks.
At the same time, dairy and avocado prices are down, though they aren't making up for all of the increase in beef costs. Just a year ago, Chipotle was warning that it may have to take guacamole off its menus, while this year a bumper crop in Mexico is pushing prices lower.
What matters most is how the company deals with shortages and price increases, and over the years, Chipotle has done an admirable job of managing through food-related issues while being true to its "Food With Integrity" motto and culture.
3. Labor costs are going up, but that's not necessarily a bad thingChipotle has tended to pay above-market wages in most of its markets, and it rarely pays only minimum wage. However, with a number of markets recently passing higher minimum-wage laws, the company is expecting to see some cost increases as a result, and it also recently expanded its benefits to now include all hourly employees as well as salaried employees.
The company used two examples on the earnings call to describe how these developments can affect costs. First, in the San Francisco Bay Area, it was seeing occupancy and labor costs increase as much as 30%, forcing it to increase menu prices in that market. However, wage boosts in Maryland weren't affecting its costs in that market as much, and the company wasn't going to raise prices there and would be able to absorb more manageable cost increases.
Ells was adamant on the call that paying higher wages, offering benefits, and providing employees with a path for growth with the company were major keys to the company's success. Some 90% of the company's store-level managers were promoted from within, evidence of a strong culture based on opportunity and rewarding effective and dedicated workers.
4. Keep these things in mind looking forwardThe company's comps should be watched, but within the context of last year's huge growth. The company does expect the return of carnitas, the full implementation of the new price increase on beef, and some market-specific pricing changes to be worth about 130 basis points in comps growth for the rest of the year. But going forward, last year's comps growth will probably make the rest of 2015's results look more pedestrian.
Store openings will provide the lion's share of growth for now, and the company may open more stores than it has been guiding for this year, according to the call. It is also opening more ShopHouse and Pizzeria Locale locations this quarter, steadily expanding those small chains as well. For now Chipotle will remain the growth driver, but in the coming years, its other properties may begin playing a bigger role in the growth story.
The company has continued to leverage its scale and be more efficient at the restaurant level, as the 27% growth in earnings demonstrated. A new workforce management system caused some labor costs to increase last quarter, but the new system is expected to help the company better staff its stores and keep labor costs in line with demand going forward.
Taken all together, it sounds as if Chipotle is more focused on its relationships with its loyal customers versus meeting Wall Street's short-term expectations. That could lead to letdowns in the short term, but it's the way great businesses should be built.
The article Chipotle Profits Up 27%, but Growth Is Slowing: 4 Key Big-Picture Takeaways originally appeared on Fool.com.
Jason Hall owns shares of Chipotle Mexican Grill. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.