CMG (NYSE:CMG) has appreciated 89% this year, making it the top performing stock in the S&P 500 index, more than doubling in value since we made our initial investment three years ago. While year-to-date results have been impressive, management emphasized throughout the second quarter call that the company is in the early stages of many of their key growth initiatives and that this was “just the beginning.”
Chipotle reported another outstanding quarter as solid execution on management’s strategic growth initiatives continues to drive improved business fundamentals. Same-store sales grew 10% in the second quarter, consistent with first quarter growth despite a more challenging prior year comparison. Transaction growth of nearly 7% was industry-leading by a wide margin, as guests continued to respond to new marketing initiatives and more convenient ways to access the brand, including pickup and delivery of digital orders.
Digital sales doubled once again and now account for 18.2% of sales, up from 15.7% of sales in the first quarter. Management raised full year 2019 same-store sales guidance for the second time this year to high-single-digit growth from mid-to-high single-digit growth. Robust sales growth is translating into improved profitability, with restaurant margins up 120 basis points year-over-year in the second quarter to just under 21%, roughly in-line with the first quarter’s levels despite a 150-basis point sequential headwind from higher avocado prices which are expected to abate.
While management’s growth strategy is already having an impact, most key initiatives are in their early stages. Digital sales mix exceeds 30% at top performing stores, more than 12 percentage points higher than the system average. Catering remains a relatively small piece of the business and therefore a tremendous growth opportunity as it accounts for a double-digit percentage of sales at other restaurant brands. The Chipotle Rewards loyalty program is only five months old and already has over five million enrolled members. Efforts to use the program’s data to incentivize higher guest frequency are still in their infancy.
Menu innovation should ramp up in the coming quarters, as management is preparing for a potential national launch of carne asada, and has received favorable customer feedback from its quesadilla pilot. While operations have improved significantly, including a notable reduction in employee turnover, there is still a significant opportunity to increase speed of service, which remains nearly 30% below historic best-in-class levels. Management’s extensive pipeline of growth initiatives combined with Chipotle’s highly attractive customer value proposition gives us confidence that the company should continue to generate superior levels of sales and profit growth.
From Bill Ackman (Trades, Portfolio)'s second-quarter 2019 Pershing Square shareholder letter.
