Industry News | April 25, 2017 | By Danny Klein | QSR Exclusive Brief

Chipotle's Comeback Story Takes a Promising Turn

Is Chipotle back? The signs are looking good in 2017. flickr: Mike Mozart
Bookmark/Search this post
Email this story Email this story
Printer-friendly versionPrinter-friendly version

Saying that Chipotle has made “incredible progress,” CEO Steve Ells expressed optimism and pride following the fast casual’s first-quarter earnings Tuesday, results that exceeded analyst expectations and wrote another chapter in the brand’s comeback story.

The more than 2,200-unit chain reported a revenue increase of 28.1 percent to $1.07 billion compared to the first quarter of 2016. Chipotle’s comparable restaurant sales increased 17.8 percent, which easily bested an analyst forecast of 14.9 percent, according to the Street Account. Diluted earnings per share were $1.60, also exceeding the $1.27 per share on $1.05 billon in revenue projected by Thomson Reuters estimates.

MORE: 3 Reasons Why Chipotle is Beating Expectations in 2017

“I’m as optimistic as I’ve ever been since starting Chipotle nearly 24 years ago,” Ells said in a conference call Tuesday. “Since last fall, when I acknowledged that many of our restaurants were not meeting my expectations, we have made incredible progress. The guest experience is improving and our crews are energized and engaged.”

Chipotle’s troubles began in 2015 when 42 locations in the Pacific Northwest briefly shut down following an outbreak of E. coli. The 14-state E. coli outbreak led to a yearlong sales downturn that erased around half of Chipotle’s market cap.

But Chipotle has been working its way back since, although it’s difficult to imagine the stock returning to where it was 20 months ago when it was selling for more than $700 per share.

Read Why Chipotle's Prices Are on the Rise Again

Chipotle’s diluted earnings per share were $1.60 in the first quarter, which also exceeded the $1.27 per share on $1.05 billon in revenue projected by Thomson Reuters. Undeniably, this was more-than-welcome news for Chipotle and its investors. The brand’s 2016 saw same-store sales fall 29.7 percent, 23.6 percent, 21.9 percent, and 4.8 percent in the first four quarters, respectively.

There were signs of optimism, however, as comparable sales rose 14.7 percent in December after dropping 20.2 percent in October and then just 1.4 percent in November.

Ells says the positive quarter can be credited to a renewed focus on the customer and the continual emphasis on high-quality and transparent food. Improvements on the digital side played a strong role as well.

“Through the first quarter, our online sales have increased 53.5 percent over the prior year and we’ve set all-time digital ordering records. Much of this improvement is related to the implementation of our smarter pick-up times technology, which dynamically assigns pick-up times based on transaction times in conjunction with our team’s commitment to providing accurate and on-time digital orders.”

Chipotle is fulfilling its digital orders from a second dedicated make line in the back of each unit led by crews designed to handle the service.

“We’re excited about the incredible potential of digital ordering and confident in our team’s ability to fulfill these digital orders,” Ells said.

Chipotle opened 57 restaurants during the quarter and closed 15 ShopHouse Southeast Asian Kitchen locations, as well as one Chipotle store, leaving the brand’s total count at 2,291.

Chipotle was also able to lower food costs, which has been a major crutch in recent quarters, especially in regards to avocados. Food costs were 33.8 percent of revenue, a decrease of 150 basis points compared to the first quarter of 2016. The brand says the decrease was driven by lower food waste and testing costs, and by bringing the preparation of lettuce and bell peppers back to the restaurants. Higher avocado prices, meanwhile, continued to offset those gains. But in perspective, food costs were 35 percent of Chipotle’s revenue in 2016. It said at the time it hoped to lower that by at least 1 percent—a claim that it is making good on so far.

Ells added that while Chipotle continues to innovate, the reason for its current success is an old one. In late March, Chipotle announced it had become the only national restaurant brand without added colors, flavors, or preservatives—artificial or natural—in any of the ingredients it uses to prepare food (except for lemon and lime juice, which can be used as preservatives, though Chipotle uses them only for taste). It followed that up with an “As Real as It gets” advertising campaign and an online game called “Spot the Imposter.”

“While many other fast food brands have been busy upgrading their menus by replacing artificial ingredients with friendlier sounding industrial additives that serve the same purpose, we’re committed to serving only real ingredients in our food,” Ells said. “But our commitment to better ingredients goes well beyond the elimination of industrial additives often labeled as natural flavors and colors, and it’s a commitment that started 24 years ago. … No other national restaurant brand is as fully committed to making better food made from whole unprocessed ingredients accessible to everyone.”

Ells also spoke about Chipotle’s planned desserts. The brand is developing two offerings that will begin testing later in April.

One is a traditional Mexican dessert called Buñuelos, which are fried tortilla strips with honey, cinnamon, and sugar. They will be served with an apple caramel dipping sauce.

“They’re delicious and complement our menu nicely,” Ells said.

The news wasn’t all rosy for Chipotle, however. Shares were up nearly 7 percent in aftermarket trading before the company announced that it was the latest major chain to experience a data breach. Those gains evaporated before rebounding 2.8 percent in Wednesday’s premarket trading.

During the conference call, the brand said it detected “unamortized activity” on a network that supports payment processing for purchases, and that it has taken steps to stop the activity. The transactions in discussion took place between March 24 and April 18.

John Hartung, Chipotle’s CFO, said the investigation was continuing and that “complete findings are not available,” adding that Chipotle beefed up security in response. Chipotle said it plans to notify affected customers about the timeframe and locations later on.

Similar breaches have affected Arby’s, Wendy’s, and full-service chain Shoney’s in recent months.

Here is the full statement Chipotle released:

"We want to make our customers aware that we recently detected unauthorized activity on the network that supports payment processing for purchases made in our restaurants. We immediately began an investigation with the help of leading cyber security firms, law enforcement, and our payment processor. We believe actions we have taken have stopped the unauthorized activity, and we have implemented additional security enhancements. Our investigation is focused on card transactions in our restaurants that occurred from March 24, 2017 through April 18, 2017. Because our investigation is continuing, complete findings are not available and it is too early to provide further details on the investigation. We anticipate providing notification to any affected customers as we get further clarity about the specific timeframes and restaurant locations that may have been affected.

Consistent with good practices, consumers should closely monitor their payment card statements. If anyone sees an unauthorized charge, they should immediately notify the bank that issued the card. Payment card network rules generally state that cardholders are not responsible for such charges."