What happened
Shares of Chipotle Mexican Grill, Inc. (CMG 6.87%) are up 6% at 12:02 p.m. EDT on July 27, having surged nearly 8% earlier in the day following the release of the company's second-quarter results after hours on July 26. Today's market enthusiasm is being driven by the company's expectations-beating results on both the top and bottom lines.
Chipotle reported $1.3 billion in sales, up 8.3% from last year, and earnings of $1.68 per share on a GAAP basis. Adjusted earnings, excluding nonrecurring restructuring and impairment expenses, were $2.87 per share. Wall Street average estimates called for $1.26 billion in sales and adjusted earnings of $2.78 per share, putting the company's actual results solidly above projections heading into the earnings report.
Image source: Chipotle.
So what
While long-term investors shouldn't get too caught up in how a company performs against Wall Street's estimates, it's certainly a positive note for Chipotle, which has struggled for more than a year to establish positive momentum after the PR disaster from its food-borne illness incidents. And there are multiple positives to note in this quarter's results.
Chipotle reported 3.3% comps growth, a solid jump from 2.2% growth in the first quarter, and a paltry 0.9% comps growth in the fourth quarter of 2017. Accelerating comps growth is also helping pad the bottom line. Restaurant-level operating margin was 19.7% in the quarter, up from 18.8% year over year and up slightly from 19.5% in the first quarter.
Now what
There's a catch -- and it's been a nagging problem for some time now -- with Chipotle's comps growth: Traffic continues to lag. In the earnings release, the company said comparable transactions declined 1.8%, with a 4% increase in prices and the addition of queso late last year offsetting the drop in customers. Higher prices were also the key to higher margins and a reduction in food costs as a percent of sales.
It's certainly a positive that Chipotle has been able to pass higher prices along to customers to a certain extent, helping increase sales and profits. But at the same time, management still clearly has a lot of work to do to bring customers back to prior levels. Simply put, price increases can only do so much before they begin driving customers away. Chipotle's long-term success will require more customers, not fewer.
Add in the early stages of Chipotle's plan to restructure its headquarters and corporate support locations, accelerate the closure of unprofitable restaurants, and invest more resources in new menu item development, and there are a lot of moving parts investors need to stay abreast of. The onus is squarely on new CEO Brian Niccol to turn things around and find the right formula to grow customer traffic.
