Recent second-quarter results from Chipotle Mexican Grill Inc. (CMG, Financial) showed a general improvement versus the same period of the prior year. Revenue increased by 8.3% to $1.3 billion, with comparable restaurant sales rising 3.3%. This was up from the comparable sales growth of 2.2% in the first quarter of the year. The restaurant-level operating margin increased by 20 basis points to 19.7% versus the first quarter of the year.
Rising revenue and a higher margin helped boost adjusted earnings per share by 24% to $2.87. This was above the consensus forecast of $2.78. The company expects to record comparable sales growth in the low-to-mid single digit range for the full year, which suggests a further improvement is anticipated in the second half of the year.
Improving prospects
The company’s stock price has risen 14% since its results were released at the end of July. This takes its gain over the last year to 67%, which is well ahead of the S&P 500’s rise of 18% over the same period.
One area of focus for Chipotle that could have a significant impact on its financial performance is the customer experience. In the second quarter, it saw a noticeable decline in complaints, helping to improve its guest satisfaction score.
It is seeking to become more consistent in terms of the quality of its food, while also investing in further staff training. Around 75% of its field leaders have been retrained in recent months through a one-week training session at Cultivate University. It also launched a new hospitality training program in its restaurants, while also seeking to create a better experience for its staff. A more engaged workforce could lead to improved levels of customer service and satisfaction.
A new loyalty program is also set to be tested in late 2018, prior to a full rollout in 2019. It may reward purchases made either in-store or through the company’s app. It could seek to personalize a customer’s offering though incentivizing frequent visits and new items as Chipotle’s refreshed menu begins to take shape over the next couple of years. A more engaged customer that is happier with their overall experience could lead to increased sales and profitability for the restaurant over the long term.
Digital growth
Another potential catalyst for Chipotle is digital growth. The company now has 4 million active monthly users across its app and website. This is a 65% increase from the end of the last fiscal year. Further investment in digital will see the number of restaurants from which delivery is available increase from 1,700 to 2,000 by the end of 2018. The national expansion of its catering services in July could boost sales over the coming months. In test stores, group order sales outperformed the base by mid-to-high single digits.
Incremental sales growth is set to be handled by further progress on digitizing the company’s second make-lines. They are now available in around 500 restaurants, with 1,000 restaurants targeted by the end of 2019. They help to minimize the impact on throughput and on the restaurant experience from incremental sales growth. Further investment in this area could provide the company with the capacity to generate improved sales growth.
Volatile stock price
While Chipotle's stock price has risen in the last year, it has a history of above-average volatility. In recent weeks, its shares have come under a degree of pressure from a foodborne illness outbreak at one of its restaurants in Ohio. This follows a norovirus outbreak that was traced to one of its restaurant in Virginia last year. Further, in 2015, there was an E. coli outbreak that affected around 60 customers across restaurants in 14 states. Since then, news of an outbreak seems to have negatively affected the company’s stock price to a greater extent than has been the case for other restaurant chains.
In order to reduce the risk of further outbreaks, Chipotle has retrained staff in food safety. It also changed its process following the 2015 E. coli outbreak.
The restaurant chain seems to be enjoying greater success with its marketing campaigns as it seeks to improve its brand strength among consumers. Its brand is gaining traction with millennial and generation z customers relative to sector peers, with the odds of a repeat visit higher among this group of consumers. The company will also focus on TV advertising as it seeks to become a lifestyle brand. This could help to improve customer loyalty and brand strength over the medium term.
Verdict
Chipotle’s focus on improving the customer experience could create a stronger company with higher levels of repeat business. Digital growth has improved in recent months, so further investment in this area could lead to it being a continued catalyst on sales over the medium term. Although the company’s reputation has been hurt in recent years due to foodborne illness-related issues, its refreshed marketing focus could improve its appeal to younger consumers. The stock price could, therefore, continue to outperform the S&P 500.
