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

The most savory insights from Chipotle's latest quarter.

Aug 31, 2014 at 12:00PM

Chelsea Ext Med

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

Burrito Bowl

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. 

Isaac Pino, CPA, owns shares of Chipotle Mexican Grill. The Motley Fool recommends and owns shares of Apple and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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