Chipotle Mexican Grill's (NYSE:CMG) growth over the past decade has been nothing short of remarkable, with the burrito slinger regularly reporting 20%-plus sales growth and comps -- or same-restaurant sales -- approaching double-digit growth. But if last quarter is any guide, then there's a good chance the company will report sales growth on Oct. 20 that falls short of what investors have come to expect.
Does that mean it's time to race for the exits? Hardly. After all, Chipotle remains an incredibly well-run business with plenty of growth ahead of it. And even with both the organic and new restaurant growth rate slowing, the company has never been more profitable, and continues to improve operating results.
With that in mind, let's take a closer look at a few keys to pay attention to when Chipotle does report earnings.
Managing food costs and supply
As was discussed in last quarter's earnings report, Chipotle is likely to regularly face supply challenges and commodity price increases that affect its costs and ability to source ingredients. Last year's big concern was avocados, while 2015 has seen the company deal with huge cost increases in beef and a major shortage of pork. While these two issues are unrelated (Chipotle fired a major pork supplier over animal treatment, while there is a national beef shortage), they have combined to make it more challenging for the company.
For example, last year's price increases only covered about 70% of the market increase in beef costs for Chipotle, so the company felt it necessary to again increase prices on its barbacoa and steak items recently. However, because of the limited availability of carnitas in many locations, management didn't raise beef prices in all locations until carnitas was back on the menu in those restaurants.
And while that does impact the bottom line, don't overlook the value in keeping customers first. Co-CEO Steve Ells has in the past said that the company could probably raise prices at just about any time and not lose business, but that doesn't mean that they should.
Focus on efficient operations
Last quarter, sales increased 14% and comps were up 4.3%. Management said that comps were almost entirely a product of last year's price increases, meaning that the majority of growth was a product of opening more locations. And while the revenue growth rate is slowing as the base of locations gets larger, the company has done an excellent job of leveraging that scale, and developing best practices to keep costs in-line.
This was evidenced by the very strong 27% growth in earnings, and the slight increase in restaurant-level operating margins the company reported.
Looking ahead: Noodles and pizza are coming, but still years from meaningful growth
For the foreseeable future, the core Chipotle restaurant business will remain the growth engine, but eventually ShopHouse and Pizzeria Locale are likely to become bigger parts of the business, fueling growth for years ahead.
But for now, investors should continue to focus on Chipotle, particularly operating efficiency and how it navigates the unpredictable nature of the food supply chain. Like any business, there will always be competition, and there will always be issues with suppliers and wholesale prices. The key for Chipotle remains the company's ability to navigate those challenges, while remaining true to its core mission of "Food With Integrity."
Don't get too caught up in Chipotle's comps when it reports earnings. Don't get me wrong: It's still an important metric. Just keep in mind the context of last year's price increases having been fully played out now, and look at the bigger picture. Comps matter, but operational execution, and management's demonstrated ability to navigate food supply challenges is just as important, if not more.
In other words, keep an eye on the big picture, not just comps.