Chipotle Mexican Grill (NYSE: CMG) has seen a sharp decline in its profitability since 2015, as a food safety crisis morphed into a broader decline in the fast casual chain’s customer appeal. However, former Taco Bell chief Brian Niccol took the helm in March and has bold plans to revitalize Chipotle’s business.
Niccol is just starting to implement pieces of his strategic plan. However, Chipotle’s comparable restaurant sales growth already started to accelerate last quarter. This led the company to raise its full-year comp sales guidance.
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Another quarter of solid results
In the first quarter, Chipotle’s revenue rose 7.4% to $1.15 billion on a 2.2% comp sales increase. Earnings per share surged 33% to $2.13, smashing the average analyst estimate. This solid result came without any help from the CEO change, given that Niccol didn’t get started until March 5.
Chipotle continued its momentum last quarter. Revenue growth accelerated modestly to 8.3% on a 3.3% comp sales increase. This drove a solid 24% uptick in adjusted EPS — which excludes a variety of restructuring costs — despite some headwinds from accelerated depreciation related to stores that are being closed and equipment that is being replaced.
One bright spot in the quarter was a big increase in digital orders. Chipotle is still early in the process of improving its digital ordering experience and promoting it to customers, but the company saw strong initial results from its new delivery partnerships. As a result, Chipotle now expects to achieve low- to mid-single-digit comp sales growth for the full year, up from its previous expectation of low-single-digit comp sales growth. This implies that comp sales trends will improve in the second half of 2018.
Chipotle isn’t getting much benefit from growth initiatives yet
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While Chipotle has stabilized its sales trend since the beginning of 2017, sales per restaurant remains more than 20% below the prior peak of $2.5 million. At an investor event last month, Chipotle discussed several initiatives designed to accelerate its sales growth, which would lead to further margin recovery.
These initiatives included updating the menu, improving the company’s marketing visibility, rolling out a permanent loyalty program, and raising awareness of Chipotle’s mobile app and other digital ordering options. Niccol believes that these moves will pave the way for Chipotle to more than double its revenue over time. (He didn’t specify how long.)
However, these efforts won’t really pay off in a big way until 2019 and beyond. Chipotle is just starting to implement its marketing changes, and the menu updates and loyalty program rollout won’t get past the test stage this year. Furthermore, while delivery is available in more than two-thirds of Chipotle’s restaurants, less than half of Chipotle customers are aware of it thus far.
The upshot is that Chipotle is already returning to health without getting much benefit from its new strategies. As these initiatives start to gain traction over the next year or two, they could drive meaningful improvements to Chipotle’s sales trajectory — and its earnings growth.
Can Chipotle avoid another food safety setback?
Niccol could face the first big test of his relatively brief tenure in the next few months. On Monday, Chipotle closed a restaurant in Ohio after several reports of customers getting sick. If it turns out that there were food safety lapses, it could negatively impact customer traffic across the whole chain.
Indeed, just a year ago, a norovirus outbreak traced to a store in Virginia led to a significant, multimonth sales slowdown even though the incident was quickly contained and far less serious than the 2015 E. coli outbreak. Niccol has made it clear that food safety must be a top priority, because these negative publicity events drive customers away.
Hopefully, there will be few, if any, additional reported illnesses this week and Chipotle won’t face another protracted food safety scare. Still, the company has been slow to bounce back from these incidents in the past. Niccol and his leadership team will need to show that they have a strategy for responding to food safety incidents that will minimize their impact on the business.
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Adam Levine-Weinberg owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
