Shares of Chipotle Mexican Grill (CMG 1.71%) recently hit a new high following the company's latest earnings update. The fast-casual restaurant chain reported strong sales growth thanks to a combination of an expanding store base and increasing customer traffic. Burrito fans didn't balk at rising menu prices, either, in part due to the chain's improvements in areas like food quality and customer service.
Yet, one metric stands out as particularly good news for shareholders planning on holding the stock through 2023 and beyond. Let's take a closer look at Chipotle's expanding profitability, which led to a near-doubling of operating income this past quarter.
The latest results
Chipotle stores aren't franchised, and so the company can't generate anything approaching the nearly 45% operating profit margin that McDonald's achieves. But corporate control does allow for the quick implementation of strategic shifts around things like staffing and the pipeline of new store launches. The chain can target attractive growth avenues like drive-thru as well.
NYSE: CMG
Key Data Points
Chipotle raised its training standards in recent months, for example, while boosting ingredient quality and cutting wait times. These improvements made it much easier to raise menu prices without hurting shoppers' appetites. Comparable-store sales rose 11% in Q1 compared to a 6% increase in the prior quarter. The growth reflected "our focus on getting back to the basics," CEO Brian Niccol said in a press release.
Margins jumped
That focus paid off for shareholders. The operating profit margin jumped to 16% of sales from 9% of sales year ago. Helping this boost was higher prices, slightly slower cost inflation, and growth in the profitable drive-thru selling channel.
CMG Operating Margin (TTM) data by YCharts
Chipotle is still far from the nearly 20% margin that the company achieved during its peak performance period nearly a decade ago. Yet the trend in recent quarters implies that it can move closer to that record by following the strategy that's already delivering results. Most of its almost 300 new locations slated to launch in 2023, for example, will feature its "Chipotlane" drive-thru services.
And while it's early still, slowing cost inflation could further boost the chain's operating margin into 2024. Several companies, including Chipotle and McDonald's, described lessening cost pressures through the late March selling period.
The lane ahead
There are many factors that could stall, or even reverse Chipotle's margin rebound. Slowing economic growth trends rank high on that list, but the chain could also stumble again with quality control challenges. Competition from McDonald's, Domino's, and other fast-food peers will remain fierce in the drive-thru and to-go channels.
But the latest trends suggest Chipotle has hit on the right growth approach -- namely, one that leans on rising customer satisfaction and improved customer traffic to push margins higher. Extending that strategy into late 2023 and beyond should support good returns for patient investors, even following the stock's rally in recent months.
Chipotle shares still look tasty at a price-to-sales ratio of 6.3 compared to McDonald's 9.1 ratio. Growth-focused investors will find a lot to like about the stock at that relatively cheap valuation.
