Chipotle Mexican Grill (NYSE:CMG) announced its second-quarter results Monday, and the company didn't disappoint. In fact, in some ways this quarter represents Chipotle's strongest performance since going public in 2006. Let's take a deeper look.
Impressive financial performance
Chipotle saw overall sales increase 28.6% year over year to $1.05 billion for the quarter, while net income saw an increase of 25.5% to $110.3 million. Perhaps most impressive, however, were Chipotle's comparable-restaurant sales, which increased an astounding 17.3% year over year, the highest increase Chipotle has seen since its first quarter as a public company in 2006.
Chipotle's strong comparable-restaurant sales performance has been supported in part by growing fax, online, and catering sales, which accounted for approximately 6% (or $63 million) of the company's total sales in the second quarter. Comparable-restaurant sales also received a boost from Chipotle's price increase in the second quarter (the first price increase the company has made in three years), which evidently did not deter customers in any significant way.
Chipotle also continued its strong cash flow production, with operating cash flow increasing approximately 26.8% year over year to $180.65 million. Free cash flow production increased about 26.5% to $125.04 million, helping to boost Chipotle's cash on the balance sheet to $470.05 million. On top of that, Chipotle remains debt-free.
To put this cash performance in perspective, Chipotle has grown total cash on its balance sheet by 45.4% (or $146.85 million) since 2013. Chipotle is a cash flow machine.
A strong culture leads to strong performance
In the earnings press release, Steve Ells, founder and co-CEO of Chipotle, said:
These extraordinary results are made possible by our special food culture, innovative people culture, and strong business model that are not only creating significant shareholder value but also helping us realize our vision to change the way people think about and eat fast food.
Our Restaurateurs form the foundation of Chipotle's culture, setting a standard for everyone else to follow. We are deeply committed to these leaders and the unique people culture they are building in their restaurants, which not only helps provide our guests with an exceptional dining experience but also enables us to deliver great results to our shareholders.
Chipotle's mission of "Food With Integrity" manifests itself more fully each quarter and each year. In 2010, for instance, Chipotle purchased 5 million pounds of local ingredients --5% of total food purchases -- or roughly 4,600 pounds of local ingredients per restaurant. This year, Chipotle will purchase 20 million pounds of local ingredients, or approximately 11,400 pounds of local ingredients per restaurant.
Chipotle had 181 Restaurateurs in 2010; as of this latest quarter, the company had more than 525 Restaurateurs. Started in 2006, Chipotle's Restaurateur program identifies and promotes from within "outstanding restaurant managers with a knack for attracting the best teams and developing them into leaders that can create outstanding restaurant experiences." These Restaurateurs now oversee and mentor more than 70% of the company's restaurants.
Future expansion prospects remain bright
Chipotle opened 45 new restaurants in the quarter and has opened 86 restaurants year to date; the company continues to project opening 180 to 195 new restaurants in 2014. Seventy percent of these restaurants will be built in proven markets, 15% in developing/established markets, and 15% in new markets. The company now expects higher comparable-restaurant sales increases in the mid-teens, something you probably won't see from any other publicly traded restaurant in the market today.
Ells noted that the Pizzeria Locale and ShopHouse concepts are "striving toward that Restaurateur culture and [are] all trying to hire top performers who they believe can be the future of their restaurants." In other words, while Chipotle provides some of its leadership talent to spark these concepts, it is encouraging the restaurants to grow organically and operate as distinct concepts separate from Chipotle.
Today, Chipotle is reaping the success of careful, measured, disciplined expansion, so investors should be glad to see the same practices occurring with ShopHouse and Pizzeria Locale. As CFO Jack Hartung said on the quarterly conference call: "We continue to believe that the best use of our cash is to invest in our high returning restaurants, and we'll continue to develop additional growth options by planting seeds including ShopHouse, Pizzeria Locale and Chipotle outside of the U.S. ... And we expect each of these proceeds will provide attractive value-enhancing growth investments in the future."
Foolish bottom line
Chipotle now operates 1,681 restaurants, 17 of which are located outside of the U.S. There are now seven ShopHouse restaurants and one Pizzeria Locale restaurant in operation, and Chipotle's rock-solid balance sheet gives the company ample resources to develop and expand these new concepts in the coming years.
As long as Chipotle reports results like these, the stock will likely trade at a premium -- and for good reason. Few, if any, other restaurants come close to Chipotle's consistent superior performance and expansion. Chipotle embodies a stakeholder-centric business focused on cultivating relationships with customers, employees, suppliers, and all stakeholders -- and as these sterling results show, it is paying off.