On Feb. 7, shares of restaurant chain Chipotle Mexican Grill (CMG 2.41%) soared to new all-time highs. The company just reported completed financial results for 2023. And in response, the market was willing to push the stock past a market capitalization of $73 billion.
Much could be said about business for Chipotle in 2023 -- it certainly smashed Wall Street's expectations. Here are two things that contributed to its success in its most recent quarter.
The one profit metric that just keeps going up
A restaurant chain such as Chipotle can measure profitability various ways, but many companies in this industry like to separate corporate expenses from those incurred inside the four walls of its restaurants. This can help distinguish between a company's overall profitability and unit-level economics.
For Chipotle, its restaurant-level operating margin is world-class and consistently increases year in and year out. Just consider the last five years of results in the table below.
| Metric | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
| Restaurant-level operating margin | 20.5% | 17.4% | 22.6% | 23.9% | 26.2% |
Data source: Chipotle's financial filings.
According to management, two big factors contributed to the significant jump for this metric in 2023.
First, Chipotle raised prices (again). This can be a touchy subject for consumers, but for investors, if a company can raise prices without curbing demand, that is good for profits. Chipotle saw a 5% year-over-year increase in transactions last year despite menu price increases, indicating they didn't hurt demand.
Second, Chipotle's avocado prices came down. Management said avocado prices were one of the smaller factors, but it was still significant enough to warrant a direct callout.
Investors who follow avocado producer Calavo Growers may be a little surprised by this. In this company's fourth quarter, its average selling prices for avocados were up 25% year over year. However, commodity price data from the Federal Reserve Bank of St. Louis shows prices have pulled back from their highs, benefiting Chipotle.
These were two things that boosted Chipotle's restaurant-level operating margin to impressive levels. And of course, this metric isn't unrelated to the company's overall operating margin. As the chart below shows, its overall operating income has grown at a much faster rate than revenue over the last five years.
Data by YCharts.
Can Chipotle build on its impressive profits?
I'd be remiss if I didn't insert a healthy dose of skepticism here. There is a limit to how high Chipotle's restaurant-level operating margin can climb. I'm not sure exactly where the ceiling is, but I do know that few restaurant businesses are as good as Chipotle already is. Further improvement would be impressive to say the least.
That said, Chipotle could indeed boost its restaurant-level operating margin further if management hits its goals.
Chipotle CEO Brian Niccol just laid out a goal to more than double the size of the business to 7,000 locations. And to go with this target, Niccol believes the company can hit average annual sales per location of $4 million. For perspective, it reported a $3 million average in 2023, which was an all-time high.
If Chipotle can boost those sales per location as Niccol hopes, that would support higher margins. Granted, there's more to it than that -- there are variable costs that could go up as well on its path to $4 million.
However, the takeaway for investors is that Chipotle stock hit a new all-time after blowing Wall Street away with record results in 2023. And as it stands right now, this restaurant chain shows no sign of slowing down anytime soon.
