Chipotle Mexican Grill (CMG 1.07%) stock is scorching higher today, up 13% after a blowout earnings report last night. During a quarter in which many retailers complained of sluggish customer traffic, the burrito chain posted a whopping 17.3% increase in comparable sales. Yes, a price increase was partially responsible for the gain, but that only added a 2.5% increase. The vast majority came because of an increase in traffic. On the top and bottom lines, the company breezed past estimates as revenue grew 28.6% to $1.05 billion, ahead of expectations of $990 million, while its per-share profit of $3.50 per share smoked the experts' projection at just $3.08.
There are lot of reasons to like Chipotle's latest report as well as the brand as a whole, but the thing that impresses me the most about the company is that, despite the jaw-dropping numbers, management has no intention of resting on its laurels. Even though Chipotle is recognized as the industry leader in fast-casual, it's still acutely aware that it operates in a competitive industry and it must keep honing and perfecting its model. The quotes below taken from last night's earnings call best illustrate this:
On food quality
Our food culture starts by finding the very best ingredients we can, with an eye to sustainability and great taste, and continues by teaching our teams how to turn these high-quality ingredients into delicious food using classic cooking techniques. We are confidently elevating and challenging ourselves to find even better ingredients and better cooking techniques so that the food we serve in the years to come is even better than it is today.
--Co-CEO and Founder Steve Ells
Chipotle is already renowned for its high-quality "food with integrity" as the company aims to serve food that is sustainably grown and responsibly raised, without the use of GMOs or antibiotics. But Ells has made this his personal mission. It's his favorite thing to talk about on earnings calls, and it's a focal point of the company's marketing campaign. As the last sentence in the above quote shows, Ells is not content with maintaining Chipotle's current level of food quality. He wants to find better ingredients and cooking methods, and expects Chipotle's food to be better in the future than it is today. To Ells and the rest of the company, there is no "good enough." The company is constantly seeking ways to improve and innovate.
Lines at Chipotle are moving faster.
On food service
One of the key operational advantages that we constantly seek to improve is our throughput. Good throughput is one way of providing great customer service and it's also working with our team to have top performers and power to achieve high standards. So it's a great sign that we were once again able to make substantial gains on this important measure of great customer service during the quarter. This quarter we posted increase of eight transactions during the peak lunch hour and eight additional transactions also during the peak dinner hour compared to last year.
What's truly impressive is that even though we have long lines at both lunch and dinner, we are able to drive a 9.4% transaction comp during our peak lunch hour and a 13.3% transaction comp at our peak dinner hour through better throughout. These are the customers who might easily walk away from our long lines to dine elsewhere except that they know that our excellent teams are geared up and ready to serve them a delicious meal quickly.
--Co-CEO Monty Moran
Serving high-quality food isn't going to do anything if your customers aren't willing to wait for it. Throughput is a key performance metric at Chipotle, and the company is continually working to improve it. As anyone who has visited the company at lunchtime knows, there is often a long line to order. But because it was able to lift transactions by 9.4% and 13.3% during peak hours, Chipotle was able to deliver such a strong comp increase in the quarter. Notably, management has no end goal for throughput; it only seeks ways to make its service faster.
Chipotle's relentless focus on becoming better isn't just having an impact on same-store sales. In the earnings call, CFO Jack Hartung noted that opening restaurant volumes have improved enough that the company boosted its range of expected annual sales from new locations from $1.6 million-$1.7 million to $1.7 million-$1.8 million, further evidence that the company continues to improve.
Foolish takeaway
Chipotle's steady focus on improving quality and service are part of what separates the company from traditional fast-food players. At McDonald's, after years of promoting new menu items with often poor results, the Golden Arches recently announced a return to driving sales of traditional offerings such as Big Macs, Egg McMuffins, and french fries. Though those items may be popular, McDonald's has no intention of changing or upgrading the ingredients as does Chipotle, which is always looking for fresher or more natural ingredients. That may be one reason that McDonald's and Yum! Brands are facing yet another food safety scandal in China, while Chipotle Founder Ells is touting a new grass-fed beef supply chain from Australia on the earnings call.
With opportunities including Chipotle Europe, ShopHouse, and Pizzeria Locale, as well as many more domestic locations, Chipotle is poised for long-term growth. But it's the company's tireless focus on improving its components -- most important, food quality and service -- that will ensure its continued success.
