Chipotle Plows Ahead

Chipotle (NYSE: CMG  ) (NYSE: CMG-B  ) bested expectations with another great quarter, beating analyst expectations, improving same-store sales, and increasing margins. These results have sent the stock soaring more than 13% in the past two days. For long-term investors, it is encouraging to see Chipotle report record results despite a tough environment for its raw materials.

Rising fuel prices have increased the costs for almost all industries, but the food industry has been particularly hard hit. Higher gas prices increase food production and transportation costs, reduce consumer discretionary spending, and bolster the demand for ethanol, which has put pressure on corn prices. This has created a ripple effect in the food industry. Higher corn prices mean higher costs for wheat, livestock, sugar, etc. ...

In recent weeks, other restaurateurs, including Wendy's (NYSE: WEN  ) , Panera Bread (Nasdaq: PNRA  ) , and P.F. Chang's (Nasdaq: PFCB  ) have issued warnings about rising ingredient costs. This quarter, Chipotle's food costs increased 100 basis points over last year. In spite of this, management was able to improve overall restaurant operating margins to 23.2% versus 21.7% last year. This improvement was primarily driven by increased throughput. As each store served more customers with the same number employees and amount of floor space, labor and real estate costs as a percentage of revenue fell. It's all about efficiency of service. During peak hours, Chipotle was able to serve 118 customers per hour.

Performance in a tough environment proves the viability of Chipotle's model and the competence of its management. This quarter's margins were an all-time high for the company, and I don't necessarily expect margins to improve next quarter. However, I'm looking forward to further efficiency improvements over the long term. Management declared its focus on improving the quality and efficiency of core products and operations, as opposed to new initiatives such as dessert, breakfast, or drive-through windows. Proposed efficiency initiatives include more employee training, new tortilla machines, and a second prep line for large orders.

While the stock is definitely pricey at more than 70 times last year's earnings, the company has a great growth story and a history of beating expectations.

Chipotle's "B" shares have been recommended to Motley Fool Hidden Gems subscribers, while the "A" shares are aRule Breakers recommendation. You can try out either of these services absolutely free for 30 days.

Here's some additional spicy information:

Brendan Mathews owns shares of Chipotle. The Fool has a disclosure policy.


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