How technology will be ‘a big part of the solution’ for restaurant labor shortages: Analyst
Wedbush Securities Managing Director Nick Setyan joins Yahoo Finance Live to talk about Chipotle's Q1 earnings report, handling inflationary costs and labor crunches, rising menu prices, and the chain's growth outlook.
Video Transcript
- All right, welcome back. Chipotle out with earnings for Q1. Revenue exceeding expectations as customers were flat-out willing to pay more for just about everything. Nick Setyan, Wedbush Securities managing director, with us now to break down these numbers. Bottom line, what stood out to you, sir?
NICK SETYAN: Well, the comp, first of all, and the guidance for Q2, right? 10% to 12% for Q2 after beating on the comp in Q1 versus a 9% expectation in Q2. So at the midpoint, we're two percentage points above consensus. Now, the margins is what everyone's going to be focused on, in terms of the commentary around Q2, whether they're going to be able to take enough pricing-- incremental pricing from here to offset the incremental food inflation we're seeing from here, especially post-Ukraine.
So that's really what the focus is going to be on the call. We didn't get any incremental information around margins-- on go forward margins in the press release, and that's going to be the key. That will determine whether the stock is up from here or might even be-- well, might even open down tomorrow, depending on margin commentary.
- Was down 5% on the day, but has risen in after hours trading. Chipotle paying a 24 year high for avocados, but today they say they're paying more for beef, paper, labor. How much of this was able to pass on to consumers?
NICK SETYAN: Yeah. This is industry-wide, right? I mean, it's not just Chipotle. Everyone's paying more for everything. And so we estimate that an incremental sort of 1% or 2% price increase from here should be enough to offset the incremental inflation we're seeing post-Ukraine.
Pre-Ukraine I thought the inflation was pretty much baked in, the pricing was enough to offset that type of inflation. But post-Ukraine, we're seeing more. So you know, I think we're going to need to see another one or two percentage points. I think that should be enough. And I think we get it, you know, on the call.
- How much of the cost increases are due to the war in Ukraine, when it comes to corn and wheat in particular?
NICK SETYAN: Yeah. Corn or wheat, that's 100% due to Ukraine, and so especially over the last, say, three weeks to four weeks. And obviously, that's something that's an important part of what Chipotle's cost of goods are. It is the new reality. Everyone has to deal with it. And so as long as grocery inflation is what it is, I think we have enough room within restaurants to take incremental pricing to offset it.
- More than 70% of Chipotle stores are in areas where the median income is $60,000 or less. Are they walking a very tight rope in terms of how much of these cost increases they can pass on?
NICK SETYAN: Well, look. I mean, that's the big question across the space. But again, when we look at the price increases that Chipotle is taking, the price increases that everyone within the industry is taking, right? McDonald's is taking over 6%. Olive Garden, I expect them to take in the mid to high single digits. So everyone's taking these price increases.
And grocery inflation is up 10%. So when you're buying pasta at the grocery store, and you're paying 50% to 100% higher than you were three months ago, suddenly that 10% price increase at Chipotle doesn't look so bad. And so historically, that's what's really mattered, is the grocery inflation. And so as long as we have that type of a ceiling, which is 10% plus in terms of grocery, I think Chipotle's current price increases are doable.
- Obviously, the cost of labor has increased, and Chipotle does some innovative things to try to address that. They're experimenting with a autonomous kitchen assistant that they call Chippie that can make tortilla chips. They've invested $50 million in Cultivate Next, which invests in innovative restaurant technology. How much is Chipotle willing to innovate to solve tomorrow's challenges?
NICK SETYAN: Bottom line is there's just not enough employees to satisfy everyone's needs. And so technology is going to have to be a big part of the solution. Chipotle, McDonald's, Jack in the Box, I mean, you name it, everyone's looking at technological solutions for that need. And so I think it's going to be a big part of capital expenditures and research and development going forward, for Chipotle and for everyone within the restaurant space.
It's not something that we're going to see benefit the bottom line in the next quarter or two, but it's certainly something that we're looking to over the next two to three years.
- So McDonald's and Domino's report Thursday. We'll see if this has any bearing on their earnings. Thank you, sir. Nick Setyan from Wedbush Securities, managing director. Thank you.
