Chipotle Mexican Grill, Inc. (NYSE:CMG)
Chipotle held a special investor call in late June during which the new management team, led by CEO Brian Niccol, outlined its strategic plan to drive both a successful turnaround and long-term growth. To enable the organization to deliver on its new strategy, management is undertaking a people and culture transformation with the aim of making the company more disciplined, results-focused, and “scrappy.” The initial stages of this transformation include the establishment of a new corporate headquarters in Southern California and the closure of the Denver and New York offices, the elimination of two management layers to streamline decision-making, and the addition of experienced external talent in marketing, menu, digital, analytics, and human resources.
Management is also revamping the company’s approach to innovation and marketing. New initiatives will pass through a “stage-gate” process in which the company tests, learns, and iterates on each initiative so that management is highly confident in the probability of each new initiative’s success before a national rollout. The company will shift its marketing from an inefficient field-based, promotion-driven approach to a centralized strategy that aims to elevate Chipotle from a food brand to a purpose-driven lifestyle brand. Management is investing in a foundational customer research project, the results of which will inform various innovation and marketing initiatives including Chipotle’s first-ever ongoing loyalty program that the company plans to test later this year and launch nationally in 2019.
In the near-term, management is focused on improving operational execution as well as accelerating progress in digital, both of which contributed to the second quarter 2018 results that Chipotle reported on July 26th. Same-store sales increased 3.3% in Q2, an improvement from the prior quarter, driven by 5.1% average check growth and a 1.8% decline in transactions. Management raised its outlook for full year same-store sales growth from low-single digits growth to low to mid-single digits growth. Restaurant margins were 19.7%, up nearly one percentage point from the prior year quarter, as decreased food costs as a percentage of sales more than offset wage inflation. Progress in improving both the crew member and guest experience was evident from lower hourly employee turnover, a meaningful decline in guest complaints, and higher guest satisfaction scores. To further improve throughput and consistency of execution, management is continuing to roll out new training materials and is redesigning its sales forecasting and labor scheduling tools.
Chipotle’s digital sales grew 33% in Q2, up from 20% in Q1, and now account for 10.3% of total sales. Delivery sales quadrupled in the quarter as the company launched a new national partnership with third-party delivery provider DoorDash and added the ability to order delivery in the Chipotle mobile app. The company will further expand its delivery and catering capabilities over the coming quarters and is accelerating the rollout of its technology-enabled second make-line over the entire store base by the end of 2019, up from roughly 500 stores today, and 1,000 stores by the end of 2018. The second make-line is a competitive advantage for Chipotle as it enables the business to handle rapid growth in digital sales without any impact on front-line throughput or the in-restaurant experience. Chipotle experienced its highest digital sales day ever on July 31st thanks to robust consumer demand for its National Avocado Day promotion, which also helped to increase awareness and downloads of Chipotle’s mobile app.
From Bill Ackman (Trades, Portfolio)'s second quarter 2018 Pershing Square shareholder letter.
