With every passing quarter, it's getting more and more likely that Chipotle Mexican Grill (NYSE: CMG ) will open its Asian-themed restaurant chain, ShopHouse, in cities across the country.
On Thursday, the company reported earnings for its fiscal first quarter. While top-line revenue grew an astounding 24%, thanks to 44 new locations and year-over-year growth at existing restaurants of 13.4%, the company's shares finished the day down by 6%.
The problem concerned Chipotle's margins. "Food costs rose a little faster than expected to 34.5% in the quarter," CFO John Hartung explained. "The sequential increase was due to higher beef and dairy costs. And in terms of the year-over-year increase, food costs were higher primarily due to inflation in beef, avocados, and cheese."
To say that investors and analysts overreacted to these concerns is an understatement. Food costs are a short-term concern, fluctuating on a nearly daily basis thanks to the interplay between the financial markets and physical commodity costs. Additionally, Chipotle can always raise prices, which recent reports suggest could happen sooner rather than later.
Most importantly, however, Chipotle has a number of exceptionally promising growth drivers. The first involves its plans to expand internationally -- it currently has 10 restaurants throughout Europe. And the second relates to ShopHouse, a quick-service Asian restaurant with six locations between Los Angeles and the Washington, D.C., metropolitan area -- for the record, Chipotle also operates a quick-service pizza concept in Denver.
Commenting on the still-nascent success of these drivers, Hartung explained on the latest conference call:
The volumes for all of our growth seeds, they're behaving similarly in general to how we saw Chipotle going into early markets back when Chipotle was kind of unknown, back in the early 2000s or so. And so there's a discovery process. And so the restaurants don't open up at the same levels that Chipotle in the U.S. does. But as the discovery process happened, we're seeing more and more people come in, we're seeing the traffic increase, and we're seeing patterns that are very similar to what we saw with Chipotle in the early days. And we find that to be very encouraging.
And here's CEO Steven Ells discussing the issue at the end of January (emphasis added):
So right now with ShopHouse and Pizzeria Locale, we're very, very focused on perfecting the experience to introducing all the new people who come through to the uniqueness and specialness of both of these concepts. Both these concepts are building nicely. We're expecting to open a couple, a few more ShopHouses this year. We're expecting to open a couple more Pizzeria Locale this year. If I compare the rate of growth so far with both of these concepts, it's faster than Chipotle started out. But I think you hit on something. When we are ready to expand at a faster rate, we certainly have the infrastructure in place.
The point here is that these concepts, and particularly ShopHouse, may soon no longer be concepts at all. As both Hartung and Ellis pointed out, they're following a similar trajectory to Chipotle, which isn't a bad path to be on, and Chipotle has the resources and knowledge base to expand them rapidly once it decides to do so.
The net result is that shareholders are nearly certain to see higher profits extending well into the future, and Chipotle fans nationwide could soon get their first taste of its foray into Asian cuisine.
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