Chipotle Mexican Grill (CMG - Free Report) practically ruined its somewhat upscale “fast casual” image when the e-coli virus hit its stores at the end of 2015. It seemed like customers and press would never forgive nor forget and investors couldn’t get out of it fast enough. But now, nearly a year and a half later, everyone is willing to take another look.
And that’s not just because it’s 18 months later (the length of consumer memory according to Cramer), but also because the company has done a huge number of things to turn things around. And the numbers tell the story.
In the first quarter for instance, revenues were up 28.1% from last year with comps up 17.8% (Chipotle opened 57 new restaurants, accounting for the balance). The quarter before that, when the trend actually started changing, revenues grew 3.7%. While comps dropped 4.8%, management pointed out that they were up 14.7% for the month of December. New restaurants numbered 72.
The improved performance in December wasn’t enough to offset higher ingredient costs with Chipotle continuing with its marketing efforts, so the operating margin was understandably lower. But the very next quarter, the operating margin was up 1090 basis points as the combined effect of lower promotional spending and better operating efficiencies.
In the current quarter, the company needs to grow sales around 12% sequentially to reach the level before the e-coli breakout. This doesn’t seem out of reach because the average increase for the second quarter in the last five years is 13%.
Moreover, after removing all added colors, flavors and preservatives from its menu items and trimming the ingredient list down to 51 manageable, organic, responsibly-sourced, freshly-cooked and high-quality items, it launched the “As real as it gets” advertising campaign. As a result, it was able to implement a 4-5% price increase across 500 stores. This is not a mean feat, and should help it generate more revenue and also absorb some of the rising labor cost.
To further improve guest experience and get more people in its stores, Chipotle has also invested in a new restaurant design, including a kitchen redesign for more efficient operation; it has added a digital ordering system from tables so customers don’t have to stand in line. It has also simplified the hiring, training and promotion processes, making guest experience a much bigger part of promotion criteria.
With all the work and expense behind it, the company is well positioned to enjoy operating leverage, which will expand margins and improve its earnings in the current quarter. So look for upward-moving share prices.
Chipotle shares currently have a Zacks Rank #3 (Hold), but you can buy restaurant stocks like Diversified Restaurant Holdings (SAUC - Free Report) , Red Robin Gourmet Burgers (RRGB - Free Report) , Papa Murphy’s Holdings (FRSH - Free Report) , or Del Taco Restaurants (TACO - Free Report) since they all have buy ratings and have seen recently seen a spike in earnings. Or, you can also see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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