A positive outlook: Key reasons behind Chipotle’s performance

Market Realist

Must-know: Why Chipotle continues to beat estimates (Part 2 of 5)

(Continued from Part 1)

Sales

Despite traditionally slow sales in the fourth quarter, Chipotle posted a 9.3% increase in comparable restaurant sales—the highest for the year. The company also marked a fourth consecutive quarter of increases in comparable restaurant sales growth.

Growth in the fourth quarter was purely driven by an increase in foot traffic, boosting consumer confidence. (In 2011, Chipotle saw 4.9% of its year-over-year comparable restaurant sales growth of 11% coming from increased menu prices.)

Management’s refocus on existing locations

Previously, tremendous new locations growth could have distracted management’s attention from improving existing locations. However, with the last year and the latest quarter, there’s been a simultaneous slowdown in store locations growth and increase in comparable restaurant sales growth.

Investors should interpret this as a positive sign, as this has allowed management to refocus on existing restaurants and increase sales comparables.

Higher throughput—not necessarily higher sales

Throughput continued to break record highs, with an average increase of six transactions during the peak lunch hour (12:00 PM to 1:00 PM) and five transactions during the peak dinner hour (6:00 PM to 7:00 PM).

It’s worth mentioning that higher throughput doesn’t automatically translate into higher sales comparables. Only with higher foot traffic will faster throughput translate into results. However, Chipotle management notes a strong correlation between faster throughput and repeat purchases. Faster throughput increases customers’ willingness to wait in line and to return.

Food prices

On the cost side, the restaurant was able to leverage on higher sales comparables to offset the increase in its most significant expense—food and beverage. F&B costs as a percentage of sales revenue rose 35 basis points, to 33.9%—the smallest increase in the year. Food is expected to increase to 34.5% for 2014, due to weather and supply constraints—specifically, avocado supply constrains from Mexico and California as well as a decrease in beef supply due to drought conditions.

Continue to Part 3

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