Key Takeaways
- Chipotle jumped about 8% after a third straight quarter of transaction growth, despite an earnings miss.
- Lower-income diners led the gain, which matters more than the miss.
- Restaurant-level margin fell to 23.3% from 24.5%.
- Reports from McDonald’s, Cava and Texas Roadhouse will show whether those trends reach beyond Chipotle.
Chipotle Mexican Grill (CMG) shares are up about 8% this morning after a third straight quarter of traffic growth. And the lower-income customers it spent last year losing led the way.
That’s news for McDonald’s (MCD), which is fighting falling U.S. guest counts, and for fast-casual rival Cava Group (CAVA). Texas Roadhouse (TXRH) pays up for the same beef.
What exactly happened
Chipotle reported after Wednesday’s close:
- Comparable sales rose 2.1%, about double July’s guide of roughly 1%, on a 1.3% higher average check and 0.8% more transactions.
- Revenue rose 9.6% to $3.3 billion, slightly above estimates.
- Earnings per share of $0.27 missed the $0.29 expected.
Most of that growth still comes from new restaurants…
The customers who came back
As Chipotle CEO Scott Boatwright put it on Mad Money, “the lower income cohort outperformed the higher income cohort for the first time last quarter, probably in the last two years.”
A year ago, households earning under $100,000, about 40% of sales, had cut visits the most. Boatwright said they spent the most in September, when promotions were lightest, so discounts don’t explain the gain.
If that’s happening across the industry, it’s good news for McDonald’s. Its U.S. comparable sales rose just 0.8% in the second quarter as guest counts fell. Will its third quarter show the same return?
Cava sets a higher bar, with second-quarter traffic up 5.3%. Its early-November report will show whether Chipotle pulled visits from it.
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Margins are the catch
Chipotle’s restaurant-level margin fell as labor rose to 25.7% of revenue from 25.2% and other operating costs rose to 16.0% from 15.0%. Food costs fell despite beef inflation.
TD Cowen downgraded the stock earlier this month on sales worries. Now analyst Andrew Charles says the firm underappreciated Chipotle’s “willingness to sacrifice margin and invest in marketing.” Some relief is coming, since menu prices rise about 3% in the fourth quarter.
Beef hits Texas Roadhouse harder. Commodity inflation of 7.0% and higher wages cut its second-quarter restaurant margin 66 basis points to 16.4%. Its November 5 report will show whether its own pricing caught up.
Still cheap after the pop
Chipotle came into the report at 23x forward earnings, far below its 41x five-year average:
Today’s jump only takes it to about 25x. Management expects fourth-quarter comparable sales of about 2%, with the quarter exiting at around 3% to 4%. That path starts from a soft patch, since traffic slipped in early October before returning to growth.
My take: three straight quarters of traffic growth outweigh a 2-cent miss, and at about 25x the stock prices in very little recovery.
Of course, the margin has to stop shrinking too, and last year’s fourth-quarter margin of 23.4% is the next number to beat.
So what is Chipotle stock actually worth?
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
