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    Chipotle Gets Sales Boost from Higher Menu Prices

  • Industry News February 6, 2018
    flickr: Aranami
    Chipotle is still searching for a new CEO to replace Steve Ells.

    Chipotle’s fourth-quarter report didn’t come with any CEO news. It did, however, show slightly better-than-expected sales thanks in large part to price hikes at established restaurants. In the fourth quarter, revenue grew 7.3 percent to $1.1 billion at the fast-casual burrito chain, lining up with Wall Street estimates. Comparable same-store sales at units open at least 13 months increased 0.9 percent versus the prior-year period, which topped Consensus Metrix’s prediction of 0.7 percent.

    “During 2017, we have made considerable changes around leadership, operations, and long-term planning and it is clear that, while there is still work to be done, we are starting to see some success,” said Steve Ells, founder, chairman, and chief executive officer, in a statement.

    Ells announced in November that he was stepping aside to assist the company in its search for a CEO “with demonstrated turnaround expertise to help address the challenges facing the company, improve execution, build customer trust, and drive sales.”

    Ells, who is switching to a chairman role, said in a statement Tuesday that Chipotle is “making good progress on our search for a new CEO who can improve execution, drive sales, and enable Chipotle to realize our enormous potential.”

    Chipotle’s comps growth was a result of an increase in average check, the company noted in the release, including a 2.4 percent impact from menu price increases taken in select restaurants during the second and fourth quarters of 2017. This was partially offset by a decrease in transactions.

    Chipotle is likely to report a larger impact from this in its next quarter as well. In January, the chain said it was completing the 5–7 percent price uptick across the entire system. Before the earlier price hike, Chipotle hadn’t changed its prices since mid-2014—before the company’s E. coli crisis.

    Chipotle raised prices at 900 additional restaurants in November, chief financial officer John Hartung said in a conference call, bringing the total impact during the quarter to about 240 basis points.

    “Average check also benefited by about 200 basis points from queso,” he said. “And queso continued to add about 200 basis points to the average check in January as guests are currently adding queso in a little more than 10 percent of our transactions.”

    Chipotle showed some improvement in its business. Restaurant-level operating margin improved 140 basis points to 14.9 percent of sales, or 13.5 percent better than the previous year. Chipotle credited this primarily to “decreased promotional activity and lower food, beverage, and packaging costs as a percent of revenue.”

    Labor costs were level at 27.5 percent of sales, and food/beverage/packaging costs as a percentage of sales dropped 110 basis points compared to the prior-year period to 34.2 percent. Chipotle said “the benefit of the menu price increases, cost savings initiatives related to paper and packaging products, and relief in avocado prices during the fourth quarter of 2017 compared to the fourth quarter of 2016,” drove this improvement.

    General and administrative expenses were also 5.2 percent of revenue, a decrease of 110 basis points over Q4 2016.

    Net income was $43.8 million, an increase from $16 million, and diluted earnings per share came in at $1.55, including a benefit of 21 cents per share from the changes in the U.S. tax law. Diluted EPS was 55 cents in the fourth quarter of 2016.

    “2018 marks the 25th anniversary of Chipotle, and I am encouraged by the dedication all of our guests and employees have to this brand. Our focus this year will be to continue perfecting the dining experience, enhancing the guest experience through innovations in digital and catering, and reinvesting in our restaurants,” Ells said.

    Chipotle opened 183 new restaurants and closed or relocated 25 in fiscal 2017, including 15 ShopHouse Southeast Asian Kitchen Restaurants. The brand opened 38 units in the fourth quarter.

    For the year, Chipotle’s revenue boosted 14.7 percent to $4.5 billion and comparable same-store sales increased 6.4 percent versus the prior-year period.

    Chipotle said price increases offered a 1.2 percent benefit for the entire year in comparable restaurant sales, and a 0.3 percent benefit from the accounting for deferred revenue during 2016 and 2016 related to Chiptopia Summer Rewards.

    In other terms, Chipotle’s comps growth in 2017 versus 2016 can be credited mainly to an increase in average check.

    The brand said it expects comparable same-store sales growth in the low single digits for fiscal 2018 and 130–150 openings. Chipotle noted that the estimate effective tax rate for the full year should range between 30–31 percent, including an underlying effective tax rate of about 27–28 percent.

    “While we expect future underlying effective tax rates in the 27 to 28 percent range, these rates will be further impacted by volatility due to accounting for taxes associated with previous and future stock-based compensation awards as well as a deferred tax asset related to market-based performance stock awards which may not vest,” Chipotle said.