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The Science of Hitting
The Science of Hitting
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Chipotle - Continuing to Grow, But Still Quite Expensive

February 02, 2012 | About:

Chipotle Mexican Grill (CMG), the restaurant/fast food operator, continues to grow like a week; fourth-quarter 2011 sales, which were reported on Wednesday after the close, increased nearly 24% from a year ago to $597 million. This increase came from a mix of new stores (67 in the quarter) and a comp of 11.1% from fourth quarter 2010 (sixth consecutive quarters of double-digit comp), driven by 4.9% from pricing and the remainder from increased traffic.

For the full year, sales increased 23.6% to $2.3 billion, with comparable sales up by a nearly identical amount to fourth quarter (11.2%). For the full year, Chipotle opened 150 new restaurants, including one ShopHouse (Southeast Asian concept) and one Chipotle in London, bringing the total restaurant count to 1,230; in 2012, the company expects to add another 155-165 restaurants to the total, including an additional ShopHouse restaurant and the first Chipotle in Paris.

Food costs continue to rise, and were up 120 basis points in the quarter to 32.2% of sales; for the full year, they were up even more dramatically (190 basis points), and resulted in food costs at 32.5% of overall sales. For 2012, management expects food inflation to continue, to the tune of a mid-single digit increase from the level in the fourth quarter.

While food costs create problems, I continue to believe that this is one area where Chipotle has a huge advantage over competitors looking forward; here’s what chairman and co-CEO Steve Ells had to say about the company’s food on the call:

"As of the end of the fourth quarter, all of the meat we served in our restaurants was naturally raised, coming from animals that are never given antibiotics or added hormones and raised in a humane way… Today, we're the only national restaurant company to serve all naturally raised meat. And it is one of the ways we are changing the way people think about any fast food…

We're also making progress in our efforts to better educate customers about food culture and the things that make Chipotle so unique. Our Back to the Start short film, the animated piece that shows the farmers journey from more sustainable farming to a more industrial one and then back again, has been viewed online about 4.5 million times. Through its run on nearly 10,000 movie screens nationwide and from YouTube, it has been seen more than 26 million times and it's making an impression on those who have seen it. According to our research, nearly 80% of previous theater attendees recall seeing the spot, with 84% saying they found it relevant.”

As Ells noted, the company did not always serve naturally raised meat; at times in years past, this may have only accounted for 75-85% of their servings because of difficulty finding an adequate supply to meet their ever-increasing demand. While this may be of relatively little importance today, I think it will continue to become a separator, especially as consumers continue to ask restaurants, “What’s in my food?” (McDonald’s recent announcement to remove “pink slime” from their hamburgers is a perfect example.)

The increase in food costs was partially offset by a decline in both labor and occupancy costs, which decreased (as a percentage of sales) for the year by 80 and 50 basis points, respectively. As a result, operating income as a percentage of sales declined just 30 basis points year over year (15.4%), and came in at $350.5 million, up 21.8% from 2010.

Net income for the full year was $215 million, an increase of 20.1% (slightly higher tax rate explains differentiation from operating income); a slight increase in the share count from a year ago caused diluted EPS to grow at a slightly slower rate (19.9%), to $6.76 per share.

CMG was down slightly in after hours trading, closing around $364 per share; that is more than 50x the company’s 2011 EPS.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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