In the recently ended 2021 fourth quarter, Chipotle Mexican Grill (CMG 0.44%) generated revenue of almost $2 billion, up 22% from the prior-year period. But what stood out was the company's adjusted diluted earnings per share of $5.58, which exceeded Wall Street's expectations.
The stock popped 10% on Wednesday, a day after the financial release. These earnings are impressive given the inflationary pressures that Chipotle and the broader economy have been facing in recent quarters.
Let's take a closer look at how this fast-casual restaurant stock is handling the current situation.
Image source: Getty Images.
Chipotle is dealing with higher food and labor costs
Two of the biggest operating expenses for Chipotle are food and labor, both of which have been severely impacted by the current economic climate. Food prices in January were up more than 7% in the U.S. compared to January 2021. And the labor force participation rate (a measure of the percentage of people 16 years and older who are working or actively seeking employment) is below pre-pandemic levels.
This has created a difficult operating environment for many restaurants. "Besides ongoing labor pressures, our Q4 margin was impacted by a higher level of commodity inflation than we originally expected, primarily due to elevated beef and freight costs," CEO Brian Niccol mentioned on the Q4 2021 earnings call.
During the latest quarter, food, beverage, and packaging costs represented 31.6% of total operating expenses, up from 31% in the prior-year period. And labor costs accounted for 26.4% of total operating expenses in Q4, up from 25.4% in Q4 2020.
When it comes to staffing, Chipotle is in a great position. Besides its competitive hourly pay, restaurant crew members receive tuition assistance, paid time off, a 401(k) retirement plan, and health insurance. Being viewed as a top retail business to work for, particularly in this environment, has helped staffing at the company's restaurants become better than it was before the pandemic.
Chipotle has pricing power
No matter what happens on the cost side, Chipotle has proven that it has the pricing power to absorb rising expenses. Management implemented price hikes of roughly 4% last June. Then last December, the company raised prices again by 4%. And compared to the same time last year, customers are paying about 10% more for their Chipotle orders.
Despite the higher prices, Chipotle keeps growing revenue without missing a beat. Niccol pointed to the fact that a chicken burrito bowl is still less than $8 in most parts of the country, a significant value when you look at competitive offerings not only in the fast-casual space but from fast-food chains as well.
Offering consumers more perceived value than what they pay is a strategy that has worked well for Chipotle. "So we've got a lot of pricing power. Our customers appreciate the brand, appreciate the culinary," Niccol said on the Q4 2021 earnings call. "And we're fortunate to be in that position." If circumstances call for it, expect more price hikes in 2022.
Pricing power is one of the top attributes famed investor Warren Buffett looks for in a potential investment. Even with the ongoing inflationary pressures, Chipotle is thriving today because of it. This makes it an outstanding business, because it should be better able to navigate any economic uncertainties on the horizon.
