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Chipotle Mexican Grill Has the Recipe for Continued Success

By Brian Hill - Feb 23, 2014 at 11:40AM

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As consumers remain cautious about spending, restaurant chains have reported varying degrees of success -- but Chipotle Mexican Grill has still been a star performer.

Data from the U.S. Census Bureau reported by the National Restaurant Association, or NRA, showed that in January restaurant sales declined for the second month in a row after reaching a record high in November.

The NRA's Chief Economist Bruce Grindy said that despite the short-term downtrend, the NRA forecasts sales growth of 3.6% for the industry in 2014 based on continued improvement in the economy and high levels of pent-up demand among consumers.   

The important question is which restaurant companies have successfully navigated these choppy waters and have been able to show significant gains in revenue and profit?

That's why today we'll focus on Chipotle Mexican Grill (CMG 4.59%), which just announced its full-year 2013 results. We will also check in to see how Bravo Brio Restaurant Group (NASDAQ: BBRG) and Fiesta Restaurant Group (FRGI 3.71%) have fared in comparison.

The kind of year every restaurant company wished it had
Fabulous is a good way to summarize Chipotle Mexican Grill's full-year operating results. Revenue was up 17.7% over the previous year to reach $3.21 billion. Chipotle achieved this result because its comparable-restaurant sales rose 5.6% due to increased traffic and it opened 185 new restaurants in 2013, which brought its total store count to 1,595.

Food costs increased by 80 basis points as a percentage of sales, as the costs of key ingredients salsa, meat, and dairy all rose.

For the full year, labor, occupancy, and other operating costs declined as a percentage of revenue for Chipotle. General and administrative costs declined by 40 basis points as a percentage of revenue as the costs were spread over the higher revenue base.

This solid operational expense management resulted in a net income increase of 17.8%, which matched the increase in sales.

What Chipotle does so well 
Chipotle operates in the fast-casual segment of the restaurant industry, which is growing at a nice clip because consumers are responding favorably to food quality that is as good as that of full-service restaurants combined with the convenience of a quick-service operating model.

The company strives to use the highest-quality ingredients, which include organically grown produce and naturally raised pork, beef, and chicken -- a concept the company calls Food With Integrity. This integrity comes at a price -- higher than industry-average food costs -- but Chipotle also tries to keep the prices of its menu items affordable for the average consumer.

Chipotle highlights from the ICR XChange conference
A slide from the company's presentation at this conference that really stood out was the Unit Economic Model for a Chipotle restaurant. Average trailing-12-month sales for a restaurant are approximately $2.1 million according to the company, with a restaurant-level cash flow of $565,000. This means Chipotle's restaurant-level operating margin is 26.4% -- quite high for a restaurant -- and given an average investment of $800,000 for a unit, the annual ROI is 70.6%.

Multiply that by 1,500 locations and you will clearly see why this company is so profitable.

Chipotle is focused on improving throughput -- getting customers through the line more quickly. This enhances customer service, and of course moving customers through the line more quickly during peak traffic times means that additional customers can be served.

The company also believes that its Mexican Grill model can work with other food styles. It has invested in an entity that operates Pizzeria Locale. This company also uses high-quality ingredients and makes customized pizzas for guests -- and gets the food to them quickly.

Not so sunny in Tuscany
Bravo Brio Restaurant Group operates two Italian restaurant brands, BRAVO! Cucina Italiana and BRIO Tuscan Grille. The BRAVO! restaurants feature Roman Ruin decor and have open-style kitchens. BRIO restaurants focus on the flavors of the Tuscany region of Italy.

This company's niche is "upscale affordable," as it aims to provide fine-dining food quality at prices closer to those of casual restaurants.

This company's results for the first three quarters of the year show just how spectacularly Chipotle performed in comparison.

Bravo Brio's revenue was up only 2.6% from the same period last year. Comparable-restaurant revenues decreased by 3.3%, with Bravo! locations down by 2.3% and BRIO down by 4.1%

The company has managed its food costs very well year-to-date, with those costs as a percentage of revenue down by 20 basis points. Labor, operating, and occupancy costs increased as a percentage of revenue.

The tepid sales and higher costs combined to bring about a 12.8% decline in net income for the company, to $10.2 million or 3.3% of its revenue.

An earnings fiesta
Fiesta Restaurant Group is the owner and franchisor of the Pollo Tropical and Taco Cabana brands, which operate in the fast-casual segment of the market.

For the first three quarters of 2013, the company's revenue was up by a very fine 8.4% from the same period last year. Pollo Tropical locations reported a robust 5.5% increase in comparable-restaurant sales for the first three quarters, which followed up on an even more robust 8.1% increase in the 2012 period from 2011.

Taco Cabana's comparable restaurant sales were up just 1.6% for the first three quarters.

Cost of sales and restaurant wages both rose by lesser percentages than revenue did. As sales also increased, this resulted in a 28.7% year-over-year increase in income from operations. 

What we learned
Any way you look at Chipotle's performance for 2013, it was outstanding. An over-10% net profit margin on sales for a full year is a great achievement for a restaurant company. In addition, the company increased its restaurant count by 13% in just one year.

Recently I wrote about the favorable results for upscale restaurant operator Ruth's Hospitality Group. Today we saw how two fast-casual chains, Chipotle and Fiesta, have also been doing well whereas Bravo Brio's CEO said that "quarterly revenues fell short of expectations." 

The chains that are thriving are the ones that have signature dishes with outstanding, memorable flavors. Fiesta's Pollo Tropical restaurants serve wonderful Caribbean-inspired citrus-marinated grilled chicken. Chipotle is known for its outstanding burritos, and of course Ruth's is known for just about the best steaks on the planet.

Bravo Brio faces the challenge of differentiating itself from other similar Italian-style restaurants. It seems to have lost some brio ("vivacity" in Italian) with a segment of its customer base.

Fiesta Restaurant Group and Chipotle Mexican Grill should definitely be on the menu for long-term investors.    

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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,402.42 (4.59%) $61.51
Fiesta Restaurant Group, Inc. Stock Quote
Fiesta Restaurant Group, Inc.
$7.54 (3.71%) $0.27
Ruth's Hospitality Group, Inc. Stock Quote
Ruth's Hospitality Group, Inc.
$18.75 (3.48%) $0.63

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