It may not look like a good result when a company reports a double-digit decline in revenue, an 82% drop in earnings, and falls well short of Wall Street analyst estimates in both categories...but when you're Chipotle Mexican Grill, Inc. (NYSE:CMG) and you're coming off the worst two quarters in company history, there's a good chance the result is one that you'll be happy with, thank you very much.
This is especially true if the results indicate a recovery from those two worst-ever quarters, and offer up hope that customers are starting to come back. The good news is, there are signs that's happening. Here's a closer look at the results.
|Metric||Q2 2016||Q2 2015||Change|
|Revenue||$998.4 million||$1,197.8 million||(17%)|
|Net income||$25.6 million||$140.2 million||(82%)|
|Earnings per share||$0.87||$4.45||(80%)|
|Comparable-store sales||(23.6%)||4.3%||(2,790 basis points)|
Much like last quarter, comparable-store sales are slightly misleading as a measure of store traffic. Comparable-store transactions declined 19.3%; nothing to write home about, but slightly less worse than the comp sales, and a minor improvement from last quarter's 21% transactions decrease.
It's nothing to jump for joy over, but it's a measurable financial improvement, and evidence that sales, if not set to rebound quickly, have at least stabilized.
Costs still high but stabilizing; sales recovery will be key driver to improved costs in the near term
Just like in the first quarter, Chipotle's sales costs went up a as percentage of sales across the board in Q2:
But the results were improved from the first quarter, particularly in restaurant-related operating costs:
Chipotle isn't going to cut costs to meet short-term profit targets. Management has been abundantly clear that the focus is on providing a great customer experience, and fully implementing the new food prep and supply chain safety processes. On the earnings call, CFO Jack Hartung spoke at length about this, saying that roughly 800 basis points of its lost operating margins were tied to lost sales, and until sales recovered, the company couldn't justify using price increases to address other cost increases, such as higher food and labor costs.
What management said
Co-CEO Steve Ells, on the impact of the promotional marketing program, Chiptopia, and sales recovering in recent months:
Though the program is just a few weeks old, we're already seeing approximately 30% of all transactions participating in Chiptopia. We are seeing further improvement in both comparable-restaurant sales and transactions with comp sales down about 21% in July and traffic improving so that it is now down to a negative mid-teens for July so far.
Co-CEO Monty Moran, on how the E. coli outbreak and subsequent impact to sales could temper the company's expansion plans going forward:
We've refocused our real estate team on assessing future openings with a more conservative lens that takes into account our current economic model, particularly given recent changes to our average unit volumes. ... This may slightly temper the number of openings in these markets in the near term as we look to rebuild our sales momentum and will help us ensure strong new store productivity.
The impact from this is primarily on where we open new stores with a minimal impact on the total opening. Because the real estate pipeline is inherently long term in nature, some of our efforts to reprioritize our market mix will not be realized until late in 2017.
Ells also addressed how the company is handling the duties normally covered by Chief Creative and Development Officer Mark Crumpacker, who has been placed on a leave of absence, following his arrest on misdemeanor cocaine possession charges:
In Mark's absence, we have asked Mark Shambura, our director of brand marketing, to lead our marketing team and Carolyn Anderson, executive director of facilities, construction and design, to lead our development efforts. And we have asked Curt Garner, who joined us as CIO late last year to lead our e-commerce team.
This is obviously a sensitive situation and it's unclear when -- or if -- Crumpacker will even return. Only time will tell how this affects the company's efforts to rebuild trust with lost customers, as Crumpacker had been a key executive in the company's strategic marketing actions.
And there's evidence the company's efforts are starting to pay off. Director of Brand Marketing Mark Shambura:
In a June 2 survey by YouGov, for example, consumer perception for Chipotle turned positive for the first time since November. ...This improving sentiment is also supported by our own ongoing brand health tracking study which shows consistent upward trends since mid-January's all-time lows. During the second quarter, we saw modest improvement in consideration and admiration across key customer segments. And with millennials 18 to 34, a key customer group for us, we continue to see they have the most favorable opinion of Chipotle.
During the first quarter, new customer acquisition was down from the previous quarter, but we saw improvement in this area in the second quarter; a trend in new customer acquisition which we can directly attribute to our aggressive promotional offers...
...All of these programs are helping to change the conversation about Chipotle. Q2 social sentiment is at 93% of the level it was pre-crisis and the response to our Love Story film has been extremely well received. 80% of consumer conversation is positive. Overall, our marketing awareness is at its highest since Q1 2015.
A return to profits is a step forward. So is the comps trend: Down nearly 30% in Q1; down 23.6% in Q2; and down about 21% through the first three weeks of Q3. Even more evidence that business is rebounding is transactions volume: Down 21% in Q1; down 19% in Q2; down "mid-teens" through the first three weeks of Q3.
As with last quarter, the company didn't offer any guidance on sales or earnings expectations. There also wasn't any discussion of any of the company's other restaurant concepts, including the rumored TastyMade burger business -- understandably, considering that the bread-and-butter Chipotle business needs to be the company's focus for now.
The recovery is far from complete, but there are signs that the company's promotional efforts are, if not bringing customers back, at least keeping fewer from staying away. Whether the company will be able to retain them when Chiptopia ends after Q3 is the big question that investors want answered. Time will tell.