Chipotle reported a solid first-quarter with comps and restaurant margins beating expectations. This is new CEO Brian Niccol's first public conference call.
Full-year guidance was reiterated, although management believes restaurant margins should hit or perhaps exceed the high-end of 18.5%.
New unit openings for 2019 will be at or above the 2018 pace, which I consider a big deal because a big part of the valuation is future unit growth.
Optimism about a real turnaround at Chipotle is gaining traction.
I will update my model and scenario analysis and DCF shortly, and post the analysis separately. Obviously, higher expectations are now baked into the stock at this higher level.
Chipotle reported its first-quarter results after the close yesterday. This was new CEO Brian Niccol's first public conference call on the job. Not a bad start, and good thing for him that his stock-comp package was granted in March.
Underlying same-store sales grew 2.7%, which beat consensus expectations. Reported same-store sales were +2.2% because the year-ago quarter included a 50 bps positive impact from deferred revenue. That was a non-recurring benefit, so excluding that from a year ago, comps were +2.7%. Management is still guiding to low-single digit comps for the year, although this excludes any new initiatives (likely new menu items).
Comps were driven largely by pricing, which accounted for 4% of the comp. Customers adding queso added 2% to the comp. Traffic was a negative 3.3% to get to ~2.7% underlying comp sales increase. Negative traffic is always disappointing, but in the context of raising prices 5%, some negative traffic is to be expected.
Restaurant level margins expanded to 19.5% from 17.7% year-over-year. Some of this was cutting back on marketing and advertising in the quarter. It sounds like Niccol didn't love the marketing he inherited, cut it back when he arrived, and the company will ramp up new creative in 2Q and beyond. The company said its prior guidance of 17.5%-18.5% margins for the year looks conservative now, and they will probably hit the high end of that or perhaps a bit higher. Avocado pricing has come down from high levels, which has also helped.
The digitally enhanced second make-lines are now in 237 units. That improves digital order accuracy and customer feedback scores have improved almost 20%. Digital sales grew 20% year over year and were 8.8% of sales in the quarter. Customer wait times are down by more than half since launching Smarter Pickup Times last year. Mobile sales grew 41% year over year, and the new Chipotle app won the People's Choice Webby Award for best user interface for a mobile app.
Catering is 1% of sales and is a big opportunity. Chipotle has expanded catering delivery availability to 1,500 units from 940. They see a 15% increase in catering sales when they add delivery.
Crew turnover has improved to the best levels in many years. This shouldn't be overlooked. The longer crew stay on the job, the better they perform and the less training needs to be done.
Chipotle opened 35 new units and closed 2. Management still expects 130 - 150 new openings for 2018, and interestingly said 2019 should be at or above that pace. That comment jumped out at me because the pace of unit openings is a key driver of the value of the company. Plus the confidence to open more units suggests the returns on new units are improving.
On the other hand, it sounds like Niccol is going to be more aggressive with closing underperforming stores. Management cited up to 100 stores that are negative cash flowing that could be closed. I was a bit shocked by this because Chipotle has never closed more than a few stores here or there. The fact that up to 100 are negative cash flowing means closing them will improve cash flows. It would be better if they could be turned around, but closing them and seeing cash flows increase is the silver lining.
Food costs were 32.4%, down 140 bps. The decrease was driven by price increases and efficiencies in paper and packaging. Food costs should be at or below 33% for the year.
Labor costs were 27.8%, up 90 bps. 5% wage inflation is impacting that. Labor should improve to the low to mid 27% range in 2Q as sales increase seasonally, but should end up near 28% for the year. Occupancy was flat at 7.4% of sales and should remain there this year.
Other operating costs were 12.9% of sales, down 120 bps. Marketing and promo, which is included here, were only 1.8%, down 150 bps. That should bounce back for the rest of the year. Marketing and promo should be 3.5%-4.0% in 2Q.
G&A was benign at 6.7% of sales, but it sounds like G&A could increase as Niccol's new strategic plan starts to be implemented. The comment was: "As we fully develop our strategic plan to strengthen our unit economic and drive sustainable sales growth, we may need to adjust how and where we invest our G&A. As such these G&A estimates for the second quarter and the full year are subject to change and we'll update you on any known changes during the special investor call Brian mentioned earlier."
My overall takeaway is quite positive and I'm enthused by Brian Niccol's presence and his fresh look at the company. Menu innovation is coming, digital ordering and catering are big opportunities, and even drive-thrus and expanded day parts are a longer term opportunity. I am also quite bullish on Chipotle's opportunity to improve its marketing. Niccol hired his old marketing guy from Taco Bell who did a fantastic job.