Is This Cutting Into Chipotle Mexican Grill’s Business?

Chili’s of Brinker International may be silently siphoning business from Chipotle Mexican Grill.

May 5, 2014 at 6:00PM

Brinker International (NYSE:EAT) owns the Chili's Bar & Grill chain. While the chain, which recently added a new "Fresh Mex" menu, reported decent but uninspiring results, a look under the hood suggests a rapid momentum shift that could threaten Chipotle Mexican Grill (NYSE:CMG).

Bowls Together
Source:  Brinker International

With a new menu that includes a Chipotle Fresh Mex Bowl and an assortment of dishes that contain ingredients such as chipotle-garlic butter, honey-chipotle sauce, and chipotle pesto, it's obvious that Brinker International has its sights set on Chipotle Mexican Grill.

The fresh results
Brinker International reported fiscal third-quarter results on April 23. Company sales inched up 2% to $739.2 million. For Chili's, company-owned domestic same-store sales ticked up 0.7%. Adjusted earnings per diluted share popped 16.7% to $0.84.

The results look OK. They were nowhere near those of Chipotle Mexican Grill, not by a long shot, but they look OK. In the quarter just prior ending in December, Brinker International reported that company sales were up 2%, Chili's company-owned domestic same-store sales were up 0.7%, and adjusted diluted earnings per share were up 18%.

The two quarters look near-identical in terms of growth percentages with barely any noticeable change, right? Keep reading.

Pod
Source:  Brinker International

Here's where it gets interesting
If you look at the monthly breakdown for the quarter that ended in December, things went from "OK" to what looks like an all-out disaster. For the month of December alone, Chili's company-owned same-store sales plunged 4.9% while traffic nosedived 6.8%. At the time, Brinker International blamed "more severe weather" for the sudden drop in business.

Right at the same time, Brinker International launched its new "Fresh Mex" menu so analysts wondered if the weather had really caused the drop or if customers had responded negatively to the new menu. In conjunction with the vastly expansive new menu for Chili's, Brinker International began a "more aggressive marketing strategy with multiple messages around innovation, value, and branding." Naturally the drop in combination with the new strategy left observers wondering.

The rebound
Well, it wasn't exactly the typical outdoor tanning and beach volleyball weather in January and February either across America. Yet in January, same-store sales were flat while they were down 4.9% in December. Then they turned positive with 1.3% and 0.7% for February and March, respectively.

Has Brinker International created a hit with its new Tex-Mex menu and is it starting to build an addicted fan base just like Chipotle Mexican Grill has done?

On April 17, Chipotle Mexican Grill reported its fiscal first-quarter results. Revenue popped 24.4% to $904 million. Same-store sales soared 13.4%. Net income rose 8.5% to $83.1 million or $2.64 per diluted share. Based on those results, you would think it was all sunny skies around each Chipotle Mexican Grill.

During the conference call, Jack Hartung, CFO of Chipotle Mexican Grill, explained what was going on. He said that on days of bad weather when either a Chipotle Mexican Grill location was closed or people couldn't get to it, they would come back over the next few days. In other words, the restaurant would make up for its missed sales, and possibly then some, as people's cravings for "Fresh Mex" from Chipotle Mexican Grill didn't simply vanish.

Perhaps Brinker International is seeing the Chipotle Mexican Grill effect with its own "Fresh Mex" menu.

Bottom
Source:  Brinker International

Clues from the conference call
Brinker International has a policy of only giving guidance once a year and it does not give out detail on intra-quarter numbers. However, if you listen carefully to the conference call you can pick up on some possible hints from CEO Wyman Roberts.

First, Roberts stated, "It remains our top priority to deliver positive traffic across our business." In the same breath he mentioned consumers are "not looking for us to give food away." This implies pricing is not an issue. Likewise, Chipotle Mexican Grill believes it has pricing power.

Second, he said, "With the introduction of our new Fresh Mex bowls and enchiladas, we now have more than 20% of our guests choosing Fresh Mex entrees." 20%? That's quite a shift for a menu that previously, believe it or not, predominately consisted of American food. Further along on the call he mentioned "record-high guest satisfaction" due to new products.

Third, during the Q&A session, Roberts mentioned that the company "will continue to take share and turn traffic positive in the near future." Chili's executives tend to use more cautionary language. He mentioned two separate times on the call that Chili's will "take share" from competitors. Look out Chipotle Mexican Grill!

Finally, Roberts stated, "We're hearing and seeing some guests come in that haven't come in for a while on some of the new innovation that we're out there talking about in advertising." When asked about how soon Chili's could see a benefit from increased advertising dollars, he almost shot back "fairly instantaneous." Case closed. Look for Chili's to grow and take more market share.

Foolish final thoughts
The good news for both companies is that plenty of market opportunity exists for Chili's and Chipotle Mexican Grill to coexist side-by-side and do extremely well. They both have different business models as one is fast-casual and the other is a full-service restaurant, but atmosphere isn't the only reason why people go out to eat as the severe winter weather has proven. Sometimes it's just a matter of what you crave, and for that these restaurants compete with one another. It will be interesting to see if Chili's sales break free to the upside in the quarters ahead.

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Nickey Friedman has no position in any stocks mentioned. 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.

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