The fast-casual burrito-maker Chipotle (CMG +1.29%) is having a tough road back to recovery. A recent norovirus event has set Chipotle's "days without a public safety event" back to zero and leaves investors uncertain about the future of the company. In the most recent earnings call, Chipotle's new chief restaurant officer was put on the hot seat to discuss the norovirus event, the chief financial officer covered the improving but uninspiring financials, and the chief digital officer was the bright spot on the call reviewing the progress toward the digital future for the company. Read on for details.
Image source: Chipotle
Introducing the new chief restaurant officer
Chipotle's earnings call was a little over a week after the company's most recent norovirus event in a Sterling, Virginia store after multiple customers reported being sick. The company pinpointed the cause of the issue to be the store not following the company's food safety protocols and allowed someone to work while being sick. My colleague, John Maxfield, indicates this recent failure points to a larger problem at Chipotle, and I would agree. Here's where the introduction of Scott Boatwright, the new chief restaurant officer, couldn't come at a better time.
Boatwright had the opportunity to speak when an analyst asked about what gave management the confidence that the recent norovirus event wouldn't "set off a similar sales pattern that persisted through 2016?" His answer was a blunt criticism of the culture and should give investors and customers confidence that things will change.
I assure you that we've taken swift action on what's transpired there and making it clear to the entire organization that not following our procedures will have severe consequences... what I plan to bring to the organization here at Chipotle is a maniacal focus on the fundamentals of our business, more specifically, ensuring the integrity of our training programs to lay a strong foundation for the organization's success. This type of rigor and discipline has been absent from the brand for some time...
Boatwright goes on to say that there's one best way to run a Chipotle restaurant and emphasizes "discipline and rigor" again in his closing sentence. This focus is what will be required to reinforce the proper habits and change a culture of over 2,000 individual stores.
While the norovirus event was top of mind for investors, so was the financial performance of the company.
Financials show improvement, but not enough
Chipotle comparable store sales grew 8.1% year-over-year and overall revenue growth was a nice 17.1% increase from 2016. While these numbers look good, it is an "easy comp" comparing against a quarter where Chipotle's buy-one-get-one promotion was going on, which accounted for a majority of the same store sales increases. A better way to look at Chipotle's recovery is to look at a two-year comparison which results in a negative 17.4% comparison from Q2-2015, which is even worse than the previous quarter's two-year comparison of negative 17.2%. Investors should take away that Chipotle's recovery is going to take a while.
Individual store margins are improving, but John Hartung, Chipotle's chief financial officer, reiterated that "sales growth remains the most important lever to restoring our economic model." When looking at the store level costs, as a percentage of revenue, Q2 is significantly improved from the 2016 average, but still a long way away from the results of 2014.
Chart by author, data from Chipotle earnings reports.
While the financials won't completely recover until traffic picks back up, digital ordering continues to be a bright spot for the company.
Digital ordering is awesome for customers
Digital ordering is putting up some great growth numbers: web ordering increased 52%, mobile ordering 37%, and catering 9%. Digital orders are now being serviced by the second make line in "nearly every restaurant," which allows these orders to be processed without impacting customers in line at the stores. Digital orders rose to a record high of 8.5% of total revenue for the quarter.
In addition to the stellar growth numbers, design improvements for the second make line are finally getting implemented. Twenty-five restaurants in Manhattan are utilizing the heads-up display technology, and the results are encouraging with a 40% improvement in throughput. Curtis Garner, chief digital and information officer, indicated that the technology would be in place for an additional 100 stores by the end of the year.
Additional improvements are planned such as mobile wallet, rapid order and reorder, and "order completion notifications and arrival detection for the vehicular pickup window." Garner summarized the digital initiatives this way.
While we are in the early days of positioning Chipotle as a leader in digital, we have great momentum and are encouraged by the customer reaction and results we have seen so far.
Investors should be encouraged by Chipotle's bet on digital and the progress the company is making to have digital become an enabler for a great customer experience.
While financial results are still not where investors (and management) want the company to be, a chief restaurant officer focused on "discipline and rigor" and investments in the digital experience are some solid steps in the right direction.
