Chipotle Mexican Grill (CMG +0.87%) posted another blockbuster earnings report earlier this week. Revenue was up 31.1% to $1.08 billion on a whopping 19.8% jump in comparable sales, while earnings per share soared 56% to $4.15, making the burrito roller a standout yet again in the fast food industry. McDonald's, by comparison, saw comps fall 3.3% in its quarter just past, with operating income dropping 14%.
Despite the killer quarter, Chipotle shares actually traded down as much as 7% following the report as the market felt the company's guidance for next year was weak. Indeed, management said it expected same-store sales growth in the low- to mid-single digits, a far cry from the mid-teens clip the company is eyeing for this year.
Those burritos aren't the only thing getting fatter
A key reason for the strong growth this year in all categories was Chipotle's decision to raise prices in the second quarter. In the third quarter, the price increase lifted comparable sales by 6.3%, while average check size increased 8.5% due to larger orders in part from catering. That means the price increase contributed contributed a significant portion of the growth, but an increase customer traffic was still responsible for the majority of the increase comps at 11.3%.
The price hike also offers benefits on the bottom line as it improves margins, sending money directly to the bottom line. During the quarter, food costs actually increased by 70 basis points to 34.3% as prices for beef, avocados, and dairy increased substantially. The price increase helped offset the higher food costs, and also led to an increase in restaurant-level operating margins of 200 basis points to 28.8% in the quarter, and an overall operating margin of 250 basis points to 19.1%, giving a significant boost to profitability.
The decision to raise prices came three years after Chipotle's previous price hike in 2011, meaning investors shouldn't expect such dramatic improvements in performance every year. Still, it's a sign of Chipotle's strength that the price increase had little to no impact on customer loyalty.
Same-store sales aren't always as they seem
Same-store sales is probably the most closely watched metric in retail, but there are problems with using it, and it is often misread. The figure can be erratic from year to year as strong growth one year often leads to weaker growth in the next as a company laps the strong comp from the year before. Chipotle addressed this issue on its earnings call, noting that in Q4 2013, it posted comparable sales growth of 9.3%, meaning its comp in the fourth quarter this year will likely fall from the 19.8% it posted in the third quarter.
Management also cited the "tougher comparisons" for its lower forecast next year, and CFO Jack Hartung addressed a question about next year's forecast by saying the prediction was based on "current sales trends" and lapping on a large comp.
This year will be the second time in the last seven that Chipotle has delivered double-digit comps, as the chart below shows.
| Year | 2014* | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 |
| Same-Store Sales | 17% | 5.6% | 7.1% | 11.2% | 9.4% | 2.2% | 5.8% |
Source: Chipotle 10-Ks.
Notably, 2014 and 2011 were the two years that featured price increase at Chipotle. In the years without a hike, average growth has been in the mid-single digits. Often, it can be more useful to look at comps over a multi-year horizon, especially when looking at individual quarters.
What to expect for 2015
Even if comps come back down to earth next year, Chipotle still has plenty of good things in store. The company plans to add 190-205 new restaurants, the most ever, bringing the grand total to nearly 2,000, and it will accelerate the expansion of its growth seed concepts, ShopHouse Southeast Asian Kitchen and Pizzeria Locale, of which there are now eight and two, respectively.
On the earnings call, Steve Ells touted a sea change in the mentality of the fast-food consumer, who is now flocking to Chipotle because it serves "the best-tasting food we can" and provides "an extraordinary customer experience" as opposed to traditional fast-food restaurants that have traded food quality for low costs and preparation ease.
Those trends continue to benefit the company, as surveys have ranked Chipotle No. 1 in fast-food quality and have shown it be particularly popular among millennials, a group quickly growing in size and spending power. The company may face slightly higher food costs next year as beef prices are expected to remain elevated, but margins should continue to improve if comps increase by a few points or more.
And finally, those still scratching their heads about Chipotle's same-store sales guidance should be aware that Chipotle tends toward conservative guidance. In fact, the guidance was exactly the same for 2014 without a price increase. No one's complaining now.
