Chipotle Mexican Grill, Inc. (NYSE:CMG) grew sales at an amazing pace last year, up almost 28%. The most amazing part of that result was the fact that the majority of the growth wasn't from new restaurants. While the company did increase its store count by 12% last year, it was comps -- same-store sales -- that drove the majority of growth, with an incredible 16.8% gain in 2014.
Let's be honest: There's almost zero chance that Chipotle repeats that result. This is for several reasons, the biggest of which is that price increases were one of the drivers for comps growth last year, and management has been firm that they aren't increasing prices again so quickly -- although they haven't shut that door completely. They also gave us guidance of "low-to-mid single-digit" comps growth for 2015 on the earnings call in February.
As a result, the stock fell as much as 11% in the days following that call, and still trades about 6% below the pre-earnings price. Has the market's sentiment shifted away from the burrito (and bowl) maker extraordinaire? Does it really matter? For long-term focused investors, there's a lot more to the story than what the stock price does in a given short-term period.
With that in mind, let's take a look at the key things to follow when the company reports earnings again on April 21.
Still all about Chipotle
As exciting as the prospects may be for Chipotle's big concepts ShopHouse and Pizzeria Locale, the core Chipotle restaurants remain the primary focus. As of this writing, the company operated 10 ShopHouse locations and two Pizzeria Locales.
The ShopHouses are all concentrated in two areas: Washington DC/Maryland, and the Los Angeles metroplex. While this is about double the locations from a year ago, the company is clearly taking its time with growth, making sure that the concept works well and is scalable before a larger regional or national expansion. By keeping the new locations relatively concentrated, it will be easier to manage costs and to roll out changes quickly. Pizzeria Locale only has two locations, and frankly, is very early in its development.
Back to the Chipotle stores. The company plans to open as many as 205 new locations this year, and if comps come in within management's guidance, they will drive the majority of new sales.
Food costs will likely impact margins
As noted above, Chipotle's big boost from last year due to price increases isn't going to happen again this year. And if you haven't heard -- (and if you haven't, where have you been?) -- there's a serious water problem happening, especially in California. Parts of Texas have also been dealing with record low levels of rain in recent years. This has become a major problem for cattle ranchers, and herd counts are at some of the lowest levels in years.
This, of course, means beef is at record prices. Chicken and pork prices have remained fairly steady, but it's possible that high beef prices could push other protein prices up if enough demand shifts. The thing is, it's hard to tell what both the long- and short-term implications are for Chipotle in this regard. Nonetheless, it's probably going to have some impact on Chipotle's results.
What will that look like? That's hard to say; but we do know that store-level operating margin increased 60 basis points last year, and there's a chance that number declines a bit. And that would probably impact earnings per share to some extent.
Last year's EPS growth of 35% was well ahead of revenue growth. EPS and revenue growth are more likely to be similar in percentage this quarter.
Where's the pork?
Potentially compounding these problems is the company's major carnitas shortage, starting back in January, when the company learned that one of its major pork suppliers wasn't meeting the company's standards on animal treatment. Here we are in April, and there's no clear end in sight. However, as fellow Fool Adam Levine-Weinberg recently wrote, this is a short-term concern, while Chipotle's long-term prospects are very largely tied to its "Food with Integrity" promise.
And to be pragmatic, also as pointed out by Adam, carnitas is picked by customers about 6% of the time. This makes it, at most, a 2% hit on sales, assuming that every potential carnitas customer affected by the shortage storms out this quarter instead of just ordering something else.
Remembering the bigger picture
While Chipotle could probably get away with a small price increase to make up for higher beef costs, and it could have even put its pork supplier on notice that it had a window of time to correct its ways, Chipotle management understands that these would be reactive and short-term fixes.
However, beef prices have continued to climb even higher, and CFO John Hartung noted on the call in February that the company's menu prices last year haven't come close to covering its incremental costs for beef. This is being compounded, as they expected to see some shift toward cheaper items, although Hartung said that shift never materialized.
With that in mind, it's not unreasonable that we could see another price increase, especially if beef prices continue to rise. It's become a big enough story that customers would probably swallow (pun intended) another price increase.
However, the long-term story remains the company's approach to high-quality food that is ethically sourced and sold at a fair price. No matter what the stock does in the short term, the company's success will remain a product of its mission to maintain its values. For patient investors who give it years to work, that's a recipe for success.