Chipotle (CMG, Financial) shares rose 5% in the third quarter. The company held its third quarter earnings call on October 25th during which management described improving momentum in the business over the last few months and outlined a robust pipeline of initiatives to reignite transaction growth. Same-store sales increased 4.4% in the third quarter, comprised of a 5.5% increase in average check and a 1.1% decline in transactions. After slowing from mid-single-digit growth in July and August to low -single-digit growth in September, same-store sales reaccelerated to 4% growth in the first few weeks of October following the launch of the company’s new marketing campaign, which includes both national TV advertising and social media. The success of this campaign stands in contrast to a series of ineffective marketing efforts last year, and bodes well for new management’s ability to drive transaction growth with the right content in the right channels in the years to come. Digital sales grew 48% in the quarter, an acceleration from the first half of the year, with particularly strong momentum in delivery.
Since CEO Brian Niccol joined Chipotle in March, he and the rest of the management team have made significant progress in restructuring the organization, rebuilding the culture, and ensuring that the company has the right people, strategy, and initiatives in place to execute with excellence and drive sustainable long-term growth. Initiatives currently in their early stages that should drive growth in 2019 and thereafter include Chipotle’s first-ever ongoing loyalty program, slated for a national launch sometime next year, in- store pickup shelves and drive-up windows for guests to pick up digital orders, a multi-pronged effort to increase throughput back towards peak levels, and potential new menu items.
Although the stock is up 68% year-to-date, it is worth noting that Chipotle shares were trading near current levels as recently as June 2017, despite progress made by Brian Niccol, the additional investment of over $300 million of capital expenditures to build 124 net new stores and significantly upgrade the company’s digital capabilities, and the enactment of corporate tax reform which has increased the value of every pretax dollar the company earns by more than 15%. As management indicated on the third quarter call, if Chipotle can grow average annual sales per restaurant to $2.2 million from just under $2.0 million today – still well below peak levels of $2.5 million which were achieved in 2015 – restaurant margins would expand to approximately 22% from just over 18% in the last twelve months (LTM). For illustrative purposes, assuming overhead and depreciation expenses in-line with LTM levels and a tax rate of 29%, earnings per share would be approximately $17, more than double LTM levels and ~10% above peak levels in 2015, when the stock traded for more than $ 750 per share. This reflects no benefit from building new stores, which continue to generate high rates of return on capital, supporting management’s plan for ~6% growth in the store count next year alone.
From Bill Ackman (Trades, Portfolio)'s third-quarter 2018 Pershing Square shareholder letter.
