Chipotle Mexican Grill (CMG 1.70%) reported fiscal 2022 second-quarter earnings after the markets closed on Wednesday, July 26. The fast-casual restaurant chain based in the U.S. pleasantly surprised shareholders as revenue and profits increased by more than double digits.
Unsurprisingly, the stock was up 14% on the day following the report. Still, it's down 13.6% year to date as investors have feared how the company will manage the business with soaring inflation. Let's consider its most recent quarter's results to see how it's grappling with rising costs and determine if the stock has room to run higher.
Customers return to Chipotle's restaurant's
Chipotle's revenue in the second quarter, which ended on June 30, totaled $2.2 billion. That was 17% higher than the same quarter last year. The increase was a result of a combination of factors. In-restaurant sales increased by 36% year over year. Recall that at this time last year, folks were not as comfortable leaving their homes and ordering at restaurants. As the economic reopening has gained momentum, Chipotle's in-restaurant sales have surged. Meanwhile, digital sales remained robust at 39% of the overall total.
Comparable restaurant sales, which exclude the impact of new openings and closings, were up by 10.1%. That boosted the average sales per restaurant to $2.75 million. This figure has risen for four consecutive quarters as Chipotle has effectively managed the transition from pandemic lockdowns. Management had stated a long-term goal of reaching an average sales per restaurant of $3 million.
Chipotle expects this momentum to continue and is forecasting revenue growth in the mid- to high single digits the next quarter, and that includes menu price increases to be implemented in August. The company has already put through several rounds of price increases, and customers seem to be responding reasonably well. Typically, customers buy less of the product when a business raises prices. It could be that the pent-up demand to eat at restaurants outweighs the headwind from higher prices.
Chipotle dealt with higher prices of its own on inputs it needed to serve customers. Food, beverage, and packaging costs increased to $673.9 million in the quarter ended in June, up from $574.5 million in the same period the year before. Similarly, labor costs increased to $549.9 million, up from $464.5 million. The coronavirus pandemic has snarled supply chains worldwide and, combined with resilient consumer demand, has unleashed record inflation levels.
Chipotle increased its operating profit margin to 15.3%, up from 13% in the same quarter the prior year. The benefits of the economic reopening, with customers returning to restaurants, have offset the rising costs for Chipotle.
Chipotle stock is pricing in excellent prospects
That said, there is no telling how long this surge of in-restaurant customers will last. Could it wind down after consumers exhaust this pent-up demand over the next several months or quarters? That is a risk investors should not ignore.
CMG PE Ratio data by YCharts
Can Chipotle's stock continue to higher? Possibly. However, it's more likely to stay flat as it grows into its premium.
