Chipotle investing in ‘fundamentals’

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NEWPORT BEACH, CALIF. — Chipotle Mexican Grill, Inc. is investing in “being brilliant at the basics” after the fast-casual chain experienced a slowdown in sales during the latter half of the recent quarter, said Brian R. Niccol, chairman and chief executive officer. A newly launched operations initiative focuses on retraining employees on the fundamentals of the business.

“These fundamentals include having great culinary prepared and ready to serve, open to close in a food-safe environment, ensuring that restaurants are staffed and appropriately deployed across both the digital make-line and front make-line; improving order accuracy and timing for the digital business; and increasing throughput in hospitality for the in-store business,” Mr. Niccol outlined during a July 26 earnings call.

Net income for the second quarter ended June 30 was $259.9 million, equal to $9.32 per share on the common stock and up 12% from net income of $188 million, or $6.68 per share, in the prior-year period. Excluding unusual expenses related to certain legal proceedings, performance share modification, corporate restructuring, restaurant asset impairment and closure costs, offset by an unrealized gain on investments, adjusted net income was $261.2 million, which compared with $212.8 million in the year-ago quarter.

Quarterly revenues totaled $2.2 billion, up 17% from $1.9 billion the year before.

Comparable restaurant sales ticked up 10%, and in-restaurant sales grew 36%. Digital sales represented 39% of food and beverage revenue.

“We were on track for comparable sales to reach the upper end of our guidance range for the first half of the quarter,” said John R. Hartung, chief financial officer. “Since then, we’ve experienced a step-down due to a combination of macro pressures, our ability to handle the growth with relatively new workforce and a return-to-normal summer seasonality for college-based restaurants. For perspective, about 15% of our restaurants are in college towns, and we’ve not seen normal seasonality in three years.”

Chipotle will increase menu prices by 4% in August to offset inflationary pressures, including increased costs for dairy ingredients, tortillas and packaging. A new labor management tool is expected to improve productivity in the company’s restaurants, Mr. Niccol noted. New restaurant openings represent another path to growth; Chipotle opened 42 restaurants in the past quarter, including 32 with a Chipotlane drive-up window.

“We now have 430 Chipotlanes, and results continue to exceed our expectations with Chipotlanes generating higher average unit volumes and higher restaurant-level margins,” Mr. Niccol said. “In fact, a recent opening of a Chipotlane in a small town in California had one of the highest opening day sales in the company’s history.”

Executives anticipate the company will generate mid- to high-single-digit comparable sales for the third quarter. Mr. Niccol touted the brand’s resiliency in a recessionary environment, noting Chipotle “over-index(es) with higher-income consumers.”

“So even though the lower-income consumer is slowing down, we’ve not seen that happen with our higher-income consumer,” he said.

Shares of Chipotle Mexican Grill on the New York Stock Exchange on July 27 closed at $1,510.00, up 15% from the day before.