CEO Brian Niccol continues to prove his worth to Chipotle Mexican Grill (NYSE: CMG) and its investors. The company’s strategy has taken on a new meaning, with growth exceeding expectations on the dual tailwinds of expansion and deepening penetration. It can not be overstated the importance of digital ordering and Chipotlanes.
This combination is helping to sustain high-double-digit growth and provide operating leverage at the store level. This means wider margins and better-than-expected margins, and the company continues adding new stores and revamping old ones to include the Chipotlane feature.
"Our strong performance in the first quarter confirms that our focus on getting back to the basics and re-establishing Chipotle's standards of excellence is beginning to drive results," said Brian Niccol, Chairman and CEO, Chipotle. "We will continue to develop exceptional people and prepare exceptional food while treasuring each guest to further strengthen our foundation for sustained long-term growth."
Chipotle Smokes The Consensus Figures
Chipotle Mexican Grill had a stunning quarter in which revenue grew 17.2% to top $2.42 billion and exceeded the Marketbeat.com consensus estimate by 250 basis points. The strength is driven by an 11% increase in comp-store sales and the addition of 41 new stores (34 with Chipotlanes) that should sustain growth in future quarters. In-store sales increased by 22.9% as more hungry people ventured out, while digital sales grew by 39%. The Chipotlane can only be accessed by ordering through the app, there is no drive-up service, so it is a substantial addition to revenue.
The company’s margins expanded considerably due to increased leverage and lower avocado prices. The restaurant level margin improved by 490 basis points to drive a 180 basis point improvement at the operating level. This resulted in a 93.3% increase in operating income and an 85% increase in adjusted earnings.
The adjusted earnings came in at $10.50 or more than 1000 bps better than expected, and this leverage should be expected to continue. The company plans to open 255 to 285 stores this year, including 10-15 Chipotlane remodels. The new store additions alone are worth about 8% in growth, which will be compounded by expanding business at existing locations.
The company’s guidance is favorable. Execs are guiding for 2nd quarter and full year comps to run in the mid-to-high-single digit range in addition to the store openings. This should keep total growth in the low to mid-teens with the addition of expanded margins and improved profitability.
The Analysts Take Another Bite Of Chipotle Mexican Grill
The analysts are gushing about Chipotle’s Q1 results. While the growth is newsworthy, the margin outlook has made the biggest impression. In the words of BTIG analysts Peter Saleh, the margin expansion story is “still in the early innings.” The takeaway is that 19 of the 29 analysts with current ratings raised their price targets and have the consensus moving higher. The consensus assumes the stock is fairly valued at $2,000, but most new targets are above that, and many are in the $2200 range.
The chart is bullish. Shares of CMG have surged to a new high, breaking out of a consolidation range and confirming the long-term uptrend. This move has likely just begun and could easily take the stock up to $2,500 over the next few quarters.
