Chipotle Mexican Grill (CMG 1.43%) did it again. For the seventh consecutive quarter, the burrito chain posted accelerating comparable sales growth. This time, same-store sales jumped 11%, a testament to how far the company has come since the dark days of the E. coli crisis.
The strong performance, which included a 77% jump in adjusted earnings per share to $3.82, crushed estimates, but it still wasn't enough to please the market. Chipotle stock had nearly doubled this year coming into the third-quarter report, and investors seemed to believe Chipotle still needed to grow into its new valuation. The stock finished down 5.2% on the results.
What's notable about the stock's comeback under new CEO Brian Niccol is that much of the company's latest initiatives are standard fare in the fast-food industry. Having put concerns about food safety behind it, the company is bringing back customers with a combination of the same tasty food it had before and by embracing traditional fast-food industry tactics. Let's take a look at a few of these drivers.
Under Founder Steve Ells, Chipotle had refused to offer drive-thru at its restaurants, the format that chains like McDonald's use to make a majority of their sales. With the company's assembly line serving style, Ells and his management team believed that taking orders through a drive-thru would be unwieldy as customers had to look at the food as they ordered it.
However, Chipotle's embrace of digital ordering through its app and website has opened up new possibilities for drive-thru pickup. In February, Chipotle announced a new initiative it's calling Chipotlanes, or mobile pickup lanes for drivers. The company is clearly pleased with early tests of Chipotlanes; it said in its third-quarter earnings call that of the 80 restaurants it currently has under construction, half will have Chipotlanes.
Niccol noted on the call that Chipotlanes help drive the company's order-ahead business, which are some of its highest-margin orders as it can prepare them ahead of time, and they don't require delivery or use of the dining room. Most of the company's current store base isn't suitable for adding a Chipotlane, but the drive-thru option figures to play a significant role in its new restaurants, helping to drive sales growth over the long term.
2. Limited-time offers
Historically, Chipotle has also eschewed limited-time offers (LTOs), or the tried-and-true fast-food tactic of offering a specific menu item for a period of a few weeks or months like McDonald's does with the McRib. LTOs help drive traffic by giving customers something new to try, and entice them to visit while that product is still available. It also helps drive marketing as it gives the restaurant something to advertise.
In September, Chipotle introduced carne asada for a limited time, the first new protein launch under Niccol, and the customer response has been overwhelmingly positive. On the call, CFO Jack Hartung said that sales momentum led by carne asada had been especially strong in the beginning of the fourth quarter, but the company expected to run out of the limited-time offer by the end of November or beginning of December.
However, the burrito chain has other LTOs in the works, including queso blanco salads and quesadillas. You can expect Niccol, who came to the company from Taco Bell, to continue to rely on LTOs to drive traffic.
Perhaps, the biggest difference between Niccol and his predecessor is his embrace of marketing. Chipotle had avoided traditional advertising media like television, but Niccol hasn't been shy about putting the brand out there in television campaigns like "Behind The Foil," outdoor advertising, and elsewhere. When he first become CEO, Niccol called the brand "invisible," a reference to the company's ineffective marketing, and improving advertising has helped the company take back its brand and message after it had been overtaken by food safety concerns.
The company's current marketing initiatives have helped drive the carne asada offering, its rewards program, and digital ordering and delivery, supporting growth in multiple ways.
Fast food has to be fast, and though Chipotle pioneered the fast-casual concept, the chain had sometimes underwhelmed in convenience. Before the E. coli outbreak, Chipotle was known for long lines during peak hours, and even with fast throughput, the company lacked options like drive-thru that competitors had.
Digital ordering has opened up a whole new sales channel for the company, and Chipotle under Niccol has fully embraced it. Digital sales jumped 88% in the third quarter and now make up 18.3% of total sales.
Digital ordering capitalizes on the second food-making lines installed in many of its restaurants to handle excess capacity, gives customers their food with no wait, and pairs with delivery to allow customers to get Chipotle fresh from the comfort of their own home.
For the foreseeable future, digital ordering should continue to be a significant driver of Chipotle's growth since it fits well with the fast-casual concept and its customer base. Meanwhile, other tactics, like Chipotlanes and LTOs, should give the company a long tail of growth over time and ensure the company's recent comeback isn't a fluke.
Though the stock may need a breather after its rally this year, the business looks primed for more impressive growth thanks to these classic restaurant sales strategies.