Chipotle Embarrasses the Industry

Chipotle Mexican Grill once again delivered a massive earnings beat, easily surpassing analyst expectations. The company's formidable growth figures are embarassing competitors such as Darden Restaurants and Panera Bread.

Feb 7, 2014 at 5:30PM


The restaurant industry is generally not known for posting stellar growth figures, especially not during periods of relative economic uncertainty. As such, investors are pleased when a chain posts high single-digit growth, which not many companies achieve. Chipotle Mexican Grill (NYSE:CMG), on the other hand, once again delivered a blowout quarter with huge same-restaurant sales growth for the final quarter and full year. Even other fast-casual dining chains like Panera Bread (NASDAQ:PNRA) can't keep up, let alone more-established restaurant operators such as Darden Restaurants (NYSE:DRI). What's propelling these stellar growth figures?

A bit casual, a bit fast
The meteoric rise of the fast-casual eating concept is one of the most-discussed developments in the restaurant industry. As traditional fast-food chains face increasing scrutiny over food safety and health concerns, consumers look for healthier ways to eat on the go. The fast-casual segment has easily outpaced growth in the rest of the industry, growing sales by 30% between 2006 and 2010. In 2008, the segment posted sales growth of around 20% versus an overall industry increase of 3.4%. 

On to Chipotle's most recent results. For the fourth quarter, revenue increased by nearly 21% to around $844 million. Net income soared 29.8% with diluted earnings per share up by roughly the same percentage. However, the real kicker was the 9.3% same-restaurant sales increase, which is an enviable number for any company in the industry. In fact, it's quite an enviable number for almost any retailer.

For the full year, Chipotle's EPS increased by 19.7%, revenue rose by 17.7% and comp-restaurant sales increased by 5.6%.  By the end of Friday's trading session, the stock was up about 12% with investors clearly pleased about the company's results. By providing a 2014 comp-restaurant sales outlook of low-to-mid single digits, the restaurant operator is setting expectations fairly low.

The analyst take is that the company has seen increased traffic due to its marketing and advertising efforts, as it made more use of traditional channels such as print ads and billboards. Chipotle's performance is especially impressive considering the results from other retailers, most of which had a bad December. The company is furthermore looking to expand its customer base by branching out from its bread-and-butter burrito business into areas such as pizza, with the hope that it can achieve the same success in this dining category. 

Putting it in perspective
Other restaurant operators were probably not too pleased with Chipotle's results, as these results simply make them look bad. Because Panera hasn't released its fourth-quarter earnings yet, let's compare the third-quarter reports. Chipotle's 6.2% comp sales increase blew Panera's 1.3% rise out of the water, as does Chipotle's third-quarter revenue increase of 18% versus Panera's 8% increase. Moreover, Panera's outlook for the fourth quarter is disappointing at best, with the company expecting flat to 2% comp-sales growth.  

Darden's latest earnings report, for the second quarter, was a bit of a disappointment as well especially in terms of income. Diluted EPS tanked 42.3% to $0.15. Sales were a little better, up 4.6% on an overall comp-restaurant sales increase of 4.1%. By brand, Red Lobster suffered the most with its comp-restaurant sales down 4.5%. LongHorn Steakhouse was easily the best-performing Darden chain, with sales up 16.5% on a 5% same-restaurant sales increase. For full-year fiscal 2014, the outlook is fairly grim as Darden now expects EPS to drop by between 15% and 20% with same-restaurant sales down between 1% and 2%. 

The bottom line
At the moment, no company in the restaurant industry seems to be able to keep up with Chipotle's earnings, revenue and same-restaurant sales growth. Partly, this is due to the company's strong fast-casual concept, but analysts note that solid execution and successful marketing efforts have also played big parts in these results. In any case, the company seems to be putting competitors such as Darden Restaurants and even other fast-casual chains such as Panera Bread to shame.

Another company turning peers' faces red and investors wallets green
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Daniel James has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. 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.

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