5 Things Chipotle Mexican Grill's Management Wants You to Know

Smaller Chipotle restaurants provide less seating but serve take-out customers -- two-thirds of Chipotle's traffic -- just fine. Source: Chipotle.

Chipotle Mexican Grill's (NYSE: CMG  ) second quarter was, by most measures, its best in recent history. The company's sales and net income jumped 28.6% and 25.5%, respectively, driven by comparable-store sales growth of 17.3% versus last year.

For perspective, Chipotle's comps had not accelerated this quickly since its very first quarter as a public company back in 2006, a point that management eagerly pointed out on the quarterly conference call.

Beyond discussing the headline numbers, management also reflected on everything from restaurant performance to expansion to the changing face of its customers after the quarter. Here are five of the most insightful quotes for Chipotle investors.

This fast-paced burrito maker just got faster

It's well known that the typical Chipotle customer isn't looking for a leisurely two-hour lunch or dinner. In fact, management estimates that only one-third of its sales are to dine-in customers. The rest of the customers want to get in, get their burrito, and get on with their day.

Thus, transaction speed, or "throughput" as Chipotle calls it, is of the essence. And even though Chipotle's been in this business for two decades, it's still finding ways to grease the wheels of its burrito-making process.

This quarter, Chipotle restaurants increased throughput by adding eight transactions during the typical lunch and dinner rush as compared with last year. Here's management's take on why throughput really matters in the fast-food business:

"[E]ven though we have long lines at both lunch and dinner, we were 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 throughput. These are 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."
-- Monty Moran, co-CEO

Source: Chipotle.

Expansion plans look even more appetizing

As Chipotle continues to add restaurants to its current footprint of 1,681, investors are going to pay close attention to whether new stores generate the same buzz upon opening their doors. And right now the level of excitement at new locations shows no signs of fading.

Because 70% of its new restaurants this year will be opened in "proven" markets, Chipotle believes sales will accelerate at a faster pace. That means new stores will have a greater near-term impact on the top and bottom line, bolstering Chipotle's overall growth rates:

"Our new restaurants continue to perform very well, and as a result, we now expect opening sales volumes in the $1.7 million to $1.8 million range, which is up from our previous range of $1.6 million to $1.7 million. These new restaurants' opening volumes, along with our current comp trends and strong margins, allow us to strengthen our already industry-leading unit economics and returns."
-- Jack Hartung, CFO

Teenagers are craving burritos like never before

Chipotle is seeing increased traffic from a younger demographic. Source: Chipotle.

There was no silver bullet that fueled growth in this quarter. It was a combination of effective and wider marketing campaigns, price increases passed on to customers, strong catering sales, and greater throughput. But there was one category of customers that seemed to be showing up in greater numbers, according to management:

"One thing that I have noticed in the research lately is that we have had an improvement in the teen market across all different economic backgrounds, so we have strengthened and are actually, according to a Piper Jaffray survey, the most popular brand with male teens, which is up from the same quarter a year ago. So, of course, we're really happy about that because those young kids become lifelong customers, and they bring their kids and their parents -- their friends and their parents into the restaurants as well."
-- Mark Crumpacker, chief marketing officer

Chipotle's going "down under" for grass-fed beef

Although it operates in the not-so-glamorous world of fast-casual burritos, Chipotle still prides itself on including the best possible ingredients in its products. Ingredients such as grass-fed beef are a key part of Chipotle's commitment to what it calls Food With Integrity.

But with America's beef supply at a 60-year low, grass-fed beef can be hard to come by. Instead of falling back on conventionally raised meats, Chipotle discussed how it found a solution in a far-flung locale:

"We believe we found that solution by sourcing some grass-fed beef from Australia. ... We started doing this in recent months to help fill the gap between what is available and what is needed to meet our growing demand. The meat produced by these ranchers is grass fed in the truest sense of the term. The cattle spend their entire lives grazing on pastures or ranch lands, eating only grass and forages. All this beef meets or exceeds the protocols we apply to our domestically responsibly raised beef."
-- Steve Ells, co-CEO 

The most Foolish thing management said

As is typical on quarterly conference calls, investment analysts urged management to provide a more detailed outlook for the remainder of the year. Analysts, of course, have to establish their expectations right down to the last penny of earnings per share, so the more short-term guidance, the better.

Chipotle co-CEO Monty Moran, who tends to focus his vision on the long term, provided a particularly Foolish response:

"We don't have special promotions. We don't have new products...And we don't spend a ton of time, I will tell you, trying to predict what the sales are going to be. We spend most of our time trying to engage with our customers, trying to build the strongest teams we can to create empowered cultures in our restaurants, so that when marketing encourages people to come into the restaurant, when a friend says, hey, you ought to try Chipotle, and when new customers show up at Chipotle, that they have an extraordinary experience. And if that happens, they are more likely to come back."
-- Moran

The takeaway for investors

Once again, Chipotle showed that it's making progress in both day-to-day operations and planning for long-term expansion. Improvements in things like throughput indicate that restaurants are being managed effectively. As Chipotle's managers -- known as "restaurateurs" -- rise up in the ranks, the company will have more flexibility to grow its store footprint and accelerate restaurant concepts such as ShopHouse and Pizzeria Locale.

All told, there's plenty of runway left for this restaurant chain to take off. Right now, however, the market is folding high expectations into Chipotle's stock price, so this is one that investors would do well to keep on their watchlists and buy on dips. 


Read/Post Comments (13) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2014, at 3:03 PM, GWC1584 wrote:

    Three things Chipolte should know.....

    1. I tasted the food, did not like it.

    2. I do not like the fact that Chipolte would bow down to Everytown.

    3. I will not spend any more money at Chipolte.

  • Report this Comment On August 31, 2014, at 5:13 PM, umh wrote:

    With their history of hiring undocumented/illegal immigrants I'm surprised they are doing so well.

  • Report this Comment On August 31, 2014, at 9:06 PM, GeaugaTruck wrote:

    I very much dislike the tiny portions of beef in my beef burrito. I don't like rice and I like my black beans DRY, not dripping with juice that will make a burrito a soggy mess.

    Hot Heads and Qdoba can get it right, why not Chipotle?

  • Report this Comment On September 01, 2014, at 12:03 AM, JuliusCaesar wrote:

    Here are my 3:

    1. You should not be charging for chips and guac when other LEGIT Mexican restaurants with better burritos, do not charge for it.

    2. You skimp on the meat and I'm paying $7+ dollars for this primarily bean, rice and veggies burrito.

    3. You're out of your mind charging so much for guacamole, I could buy two or three avocados for the cost of 1 scoop (small) of guacamole.

  • Report this Comment On September 02, 2014, at 4:21 PM, TMFFischer wrote:

    I may get flamed for this comment, but it's true: "Food with Integrity" is really hard to argue when a product you're selling is beef or pork (or even chicken). It doesn't matter how happy the animals were during their pampered, antibiotic-free lives, growing "meat" for the mass market still leaves an enormous footprint on the environment, and it's not a pretty one. It's very far from food with integrity, even if Chipotle should be praised (gently) for raising better meat than most any other chain. And, yes, I do enjoy the food everyone once in a while -- usually a vege or sofrita burrito. But you can hardly call the company a trailblazer for health -- for people or the world -- when they sell beef, pork and chicken.

  • Report this Comment On September 02, 2014, at 6:21 PM, TMFBoomer wrote:

    @TMFFischer

    I understand your point. As you mention, I do give Chipotle credit for "raising better meat than most any other chain."

    However, I did not call it a "trailblazer for health," nor would I ever.

    It's impossible to sit here and point out all the pros and cons of veggies and meat-eaters, etc. Even after reading some compelling essays from experts on this topic, I'm left with my head spinning (http://www.motherjones.com/environment/2010/07/vegetarianism...

    I, too, think we should all eat less meat. Even Anthony Bourdain, an avowed and proud carnivore, has admitted that Americans should eat less meat. Maybe it would do wonders for the environment. But so would the abolishment of monoculture, industrial-scale veggie farms that ship their products halfway around the world.

    Anyway, as far as calling it "Food With Integrity," well, that's marketing. I'm sure some would make the claim that only a restaurant that served local, organic, seasonal food produced by workers with fair wages could bother calling it FWI...

    I'm not throwing stones at Chipotle for its marketing, though. Not while I believe it is pushing the fast food industry in a better direction. And not as other companies are selling me happiness in a can of carbonated syrup:

    http://us.coca-cola.com/happiness/happy-people/

    Appreciate the comment. If nothing else, this type of discussion about the merits of a company's product should take place. It's relevant to investors and consumers.

    @TMFBoomer

  • Report this Comment On September 02, 2014, at 7:22 PM, TMFFischer wrote:

    @TMFBoomer:

    I agree with your comments; to be clear, I wasn't critiquing your article, which I think is excellent for teaching investors five specific things about CMG.

    Context is everything, and I didn't provide it.

    My main complaint with CMG is the company's own use of holier-than-thou marketing against factory meat, even though much of the time they're serving it in their stores, because other beef isn't available at the time.

    So, they serve food with an asterisk. Their reality is really sort of like this: "It's better than you can get elsewhere, when we can source enough of it. If we can't, well... then enjoy your standard beef at a higher price than other fast food places." In those cases, it's less than food with integrity. It's misleading, since it runs against their core marketing message. And most patrons probably don't take the time to read and realize what they're actually ordering any particular day (and why not drop the prices on all the days you have standard meat?).

    But even when they are serving antibiotic-free beef that was raised on grass, it's hard to argue that it is "Food with Integrity." As you know, for every pound of beef raised, you could grow many, many pounds more of other nutrition instead, with much less harm to the environment, and feed many more people. I know that's not their mission. They have a different mission. And they do much of it well. But beef or pork is really not, by definition, Food with Integrity. It's meat. From a meat farm. One that uses abundant resources inefficiently and uncleanly, no matter how "good" it is. So, I just fundamentally disagree with how they portray themselves, and really have ever since they started compromising on their meat sources in the name of faster growth.

    But I don't disagree with your article. Obviously, I appreciate the dialogue, which is always available on the Fool.

  • Report this Comment On September 02, 2014, at 9:10 PM, TMFBoomer wrote:

    @TMFFischer

    Okay, appreciate the context. Yes, Chipotle makes out the industrial meat system to be a villain, yet it relies on this system when it's not possible to source beef, for example, from pasture-raised farms. And thus there's a premium being paid that shouldn't be there. I would agree.

    This is generally the same argument that's levied against Whole Foods or its natural foods peers because they splash images of family farms all over their walls while sometimes (maybe more often than not) sourcing non-organic, mass-produced foods.

    I understand that it gives a false impression. However, the only thing I would say is that investors, in my opinion, can filter through the information and get closer to the truth if we want to. And in that vein, consumers also have the opportunity to do their research. I'd hesitate to excuse "most patrons" for not caring enough about what they're eating. If more patrons did care - and did do research - perhaps we wouldn't even be having this conversation.

    In any case, I appreciate the dialogue, as this is similar to many issues I grapple with when debating whether a company is worthy of investment. I often wonder "Do we need what this company's producing?" and "Are they constantly striving to find the absolute best/most efficient way to fulfill that need?" It's not easy to reach a conclusion on these questions without some form of discussion.

    Fool on!

    @TMFBoomer

  • Report this Comment On September 03, 2014, at 1:55 PM, n8larson wrote:

    1. My wife can't go near one because of all the Cilantro, but I love their food.

    2. It's Chipotle, not Chipolte.

    3. I want every company I own shares of to charge absolutely whatever price they think they should for whatever they sell, regardless of whether I personally would pay that price. The market is bigger than just you or me as a single consumer.

    Offering things for free is often bad for business in the end, and should only be done under certain conditions. If "LEGIT" Mexican restaurants can grow their share price like Chipotle while giving their higher-quality food away, just pass along a ticker and I'll start my research.

  • Report this Comment On September 03, 2014, at 2:12 PM, cayoung wrote:

    @TMFFischer If you read the first few comments complaining about the "miniscule" portions of meat in each burrito, maybe Chipotle is doing it's part to reduce meat consumption :)

    I had the opportunity to pass through Baltimore International Airport twice last month. A few things I noticed (that are, IMHO, related to investing):

    1. Chipotle did not engage in the typical airport price-gouging

    2. There was a rather long lineup at Chipotle, and almost nothing at the surrounding fast-food venues (30-40 people vs. zero at Arby's).

    3. That was the slowest, most disorganized Chipotle I've ever been to. However, I still got my meal there on both occasions.

  • Report this Comment On September 03, 2014, at 4:15 PM, TMFFischer wrote:

    @cayoung: Perhaps! :)

    In general: I think as with so many others in the world, I find myself cringing at Chipotle's spin. The cattle, pigs, and chickens they put in your food is treated little different (and sometimes no differently) from standard slaughterhouse meat, especially in the end. I'm not a vegetarian. I probably eat red meat once or twice a month, and more than my fair share of seafood (almost all of which is "Yellow rated," it seems). But I don't claim the meat is "food with integrity," no matter where I get it, the way Chipotle does. The company has a long history of over-stating the quality of its food and playing on our universal dislike and fear of factory meat, even though (given its size) that's largely what it delivers (and if it has no choice, it does so without missing a beat). Sourcing meat from Australia is another step backward, in my opinion. You're flying frozen beef all the way around the world to sprinkle it on someone's salad. How is that economical? Only if the beef is very cheap. How can the beef be cheap? There's only one way it can be cheap. Think about it (especially given the strong Australian dollar). How is that beef "local" or environmentally mind? It isn't. Will I eat at Chipotle? I only do probably four times a year, but my desire to is just about gone, again mainly given how they (IMO) mislead consumers with their marketing. Any hint of stretching the truth (or emotional manipulation) just makes me want to go elsewhere. Even while I do recognize that they're in many ways better than other fast food chains, and perhaps improving industry standards slowly, both of which are good things, of course. So, net-net, are they a positive to the world? Probably, but only when compared to other meat-based alternatives. And it still doesn't excuse pushing the boundaries of reality when marketing your food.

  • Report this Comment On September 03, 2014, at 8:11 PM, hbofbyu wrote:

    Chipotle's stock chart looks just like Cisco's did throughout the 1990's. How much more running room does it have until it's P/E falls back to earth?

    There are a lot, a lot, of competitors jumping in this arena in my neck of the woods and I see more people at these places than at Chipotle (see Cafe Rio and Costa Vida). Chipotle is losing these battles.

  • Report this Comment On September 04, 2014, at 3:13 PM, cayoung wrote:

    @TMFFischer my comment was mostly tongue-in-cheek (or I'm just being a smart-ass, ask TMFCanuck about me), and I don't disagree with most of your philosophy about the marketing. I won't let that get in the way of an investment (otherwise I'd need to dump most of my investments). I will however disagree about local sourcing of food (not specifically Aussie beef however; I don't know enough about the specifics of their beef industry, but I'm guessing it's not pretty either). Here's a good take on the locavore movement: http://freakonomics.com/2011/11/14/the-inefficiency-of-local.... Compare the quality of produce at a Massachusetts farmer's market to what you get at the supermarket in California or British Columbia and you'll see a huge difference. Locavorism is a great concept if you happen to live in San Francisco, but if we all moved there to be closer to the food, where would all the farms go?

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