After Chipotle announced last Tuesday quarterly earnings that beat Wall Street estimates by nearly doubling, analysts began wondering how the fast-casual concept can improve already outstanding profit margins.
The company reported second-quarter comparable-restaurant sales increases of 11.6 percent, revenue increases of 33.9 percent to $274.3 million, and net income increases 85.1 percent to $20.0 million.
During the investor’s call, Piper Jaffray analyst Nicole Miller asked if Chipotle was considering expanding its dayparts or drive-thru in an effort grow when margins are already so good. Steve Ells, founder, chairman, and chief executive officer, replied no and added Chipotle’s success comes from “keeping things focused” on making the food better and the operations more efficient. To that end, Chipotle has passed on offering breakfast, dessert, and other new menu items based on “our conclusion that we would be better served improving our present format,” Ells said.
“Because of efficiencies elsewhere on a P & L, we’re able to invest more in our food, buying increasingly high-quality ingredients,” Ells said in the call. “We’re also improving how we prepare our food, designing more efficient equipment, and optimizing elements of our restaurant design that help our managers and crews deliver a better food and better customer experience.”
It’s this focus and dedication to the brand’s “Food With Integrity” that leads Robert Baird analyst David Tarantino to believe Chipotle is leading the transformation to a new standard of quality for quick-service restaurant meals, much like Starbucks changed the way many people drink coffee and Home Depot revolutionized the home improvement retail segment.
“We expect the appeal of Chipotle to widen as the company develops more locations and begins to fully leverage the Food With Integrity concept,” Tarantino wrote in a forecast. “We think [Chipotle’s] highly popular concept has characteristics that are similar to many great consumer brands.”
Chipotle has produced double-digit comps in each of the last nine years, and Tarantino expects same-store growth to remain healthy (mid-single-digits or higher) but to moderate from extraordinary levels.
“We see long-term potential for at least 3,000 locations (640 after Q2-07),” Tarantino wrote after the second-quarter results. “A good concept, solid industry dynamics, and limited penetration should support robust unit growth (estimating +17–20percent/year) for the foreseeable future.”