Exclusive Update
It should come as no surprise that Chipotle met expectations, given its pre-release from a few weeks prior to the actual earnings announcement. There weren't any surprises in the call or guidance for 2013 that made any real impact.
Remember that on January 15 with the pre-release, the stock fell almost 6%, from $297 to $280. However, it took no time for the stock price to recover from the news. Management's outlook for 2013 includes:
- 165 to 180 new restaurant openings, 20% of which will be A-models (which have lower occupancy and operating costs).
- Flat to low-single-digit comparable restaurant sales, excluding potential menu price increases.
- Continued focus on advertising, with a particular focus on radio, outdoor, and print ads.
Management will focus on creating awareness of the brand, which is important. The good thing is that they do this deliberately and with careful consideration given to the message they are conveying. Since we don't get inundated with their commercials, the ones we do see and hear tend to make more of an impact as they are relatively unique. In addition to ad spend, management also has promotions planned for their 25 best-performing markets in order to focus on creating more awareness of the brand.
Catering is another initiative that will take hold in 2013. The service is now available throughout the Colorado market and will continue to roll out nationwide in the coming months. Management is very enthusiastic about the implications of this program, one of which is that it will bring Chipotle's dining experience to many outside of the restaurant setting. In addition, the concept of widening the market opportunity without negatively affecting restaurant throughput is very attractive.
The international segment will add four new restaurants this year and will follow the "portfolio strategy" approach in growing its presence in proven markets &emdash; in other words, focusing on the markets where the Chipotle brand has taken root. At this time, management sees Canada as the most likely to develop into a proven market. However, with the U.K., France, and Germany in the mix, Chipotle's brand should gain similar traction overseas over time. Two new ShopHouse restaurants will also open in the first half of the year: one in Washington, D.C., and one in Los Angeles.
Food cost inflation should moderate a bit throughout the year. Most of the inflation that has affected Chipotle to date has been in beef, dairy, and some salsa components. Management did highlight that price increases could occur later in the year if food inflation trends warrant such a move. The good thing is that Chipotle has no history of abusing price increases, so it shouldn't be much of an issue. On the conference call, CFO Jack Hartung said: "While we have made no decision on a menu price increase for this year, the inflation we have seen so far makes it more likely that a price increase may be warranted, but we will monitor trends such as additional inflation going forward, our comp trends, general economic and consumer confidence trends; and, based on these factors, we will make a menu price decision later this year."
A couple other points of note:
- Throughput has improved by three customers per hour during peak hours (lunch and dinner).
- Transactions per day are up 3.4% for the quarter, 5% for the year.
- Every indication is that ShopHouse is gaining traction, and management is very encouraged by its potential.
It was a good quarter and a good year. The pre-announcement provided investors with a taste of Chipotle's earnings report, so there were no surprises. Today's price at about 30 times forward earnings is not cheap and is a premium compared to the company's peers, but it's reasonable given Chipotle's growth prospects. The market's mediocre expectations are baked in, to a degree, and with the growth story still very much intact, the stock has a tremendous amount of upside.
