Wow, what a quarter for Chipotle Mexican Grill (NYSE:CMG)! The burrito chain posted impressive numbers when it reported its fiscal third quarter results on Oct. 20 -- sales, same-store sales, and diluted earnings per share soared to record levels. However, some things in terms of outlook left me with a sour cream taste in my mouth. And that's not a good thing.
The numbers were great. Revenue jumped 31.1% to $1.08 billion. Same-store sales exploded 19.8%. Earnings leaped 56% to $4.15 per diluted share. Co-CEO Steve Ells mostly credited taking business away from traditional fast food by offering higher quality ingredients, Chipotle's dining "experience" for customers, work culture, and higher prices on the menu.
That's where the good news, or at least the best news, comes to an end.
Chipotle guided for same-store sales growth in the mid-teens for 2014 and low to mid-single digit percentage for 2015. Don't look now, Chipotle, but low to mid-single digits is the same type of "not bad but not exciting" growth common for traditional fast-food companies. Not bad is still kind of good, but with Chipotle's P/E typically between 50 and 60 these days, at least leading up until the earnings report, investors are expecting long-term continual hyper growth.
Mid-teen growth for 2014 suggests a possible slowing growth beginning in the fourth quarter -- the quarter Chipotle is in currently. For the first nine months of the year, Chipotle did 17% in same-store sales growth. If it comes in at say 15% for the full year, then the fourth quarter would have to have a serious growth lag to bring down the average by two percentage points.
Return to normalcy?
Each of the first three quarters of 2014 has been nothing short of amazing in terms of same-store sales percentage growth for Chipotle. However, if you look at the overall trend prior to this year, the same-store sales growth percentage numbers have been kind of misleading. For example, the average Chipotle restaurant in 2011 did $2.1 million in sales. In 2012, it was $2.11 million. In 2013, it was $2.17 million. There wasn't much in the way of real growth on an individual unit level.
Sometimes same-store sales growth numbers can play tricks on you because they only start counting them in Chipotle's case once a restaurant becomes 13 months old. If new restaurants, on average, start out with very poor sales compared to the chain's overall average, then these new units will have fantastic same-store sales in their second year perhaps as they develop a flow of repeat customers. That's a good thing but it may make the chain look like it's growing more than it really is. In reality, these restaurants are just getting up to speed with the rest of the chain.
For example, if 40 new restaurants only do $1 million their first year, then $1.5 million the next, those 40 stores will contribute a 50% "same-store sales growth" data point, which is great, but the $1.5 million is still far below the average of the rest of the chain -- around $2.1 million. That's just an example but it appears something similar has been happening with Chipotle as average individual restaurant sales basically went nowhere from 2011-2013, yet the company was reporting robust same-store sales growth at the same time.
2014 is a different story but only for the second and third quarter so far. If you annualize these quarters, they were the first that actually lifted out of the $2.10 million-range rut and up to $2.5 million average each. The price increases didn't do anything to lift sales in the third quarter sequentially over the second quarter as sales-per unit were a hair lower, even with the price increases. Traffic must have actually been sequentially down.
I'd say $2.5 million annualized per-unit sales is the new normal, at best, and Chipotle is back to lackluster growth in actual per-unit sales. It will, however, continue to escalate overall revenue and net income just from opening new units. Meanwhile, the fast-casual Mexican food competition is taking notice and expanding rapidly. Chipotle is a great company but the premium valuation I see is too rich for my blood considering it's mainly an investment based on further unit growth and not the more important sales-per-unit growth.