Chipotle Earnings: Consumers Swallow Rising Burrito Prices as Traffic Remains Robust; Shares Pricey

We plan to raise our $1,550 fair value estimate for wide-moat Chipotle CMG by a mid-single-digit percentage after the firm reported surprisingly strong traffic and margin figures in its first-quarter earnings report, consistent with the market’s reaction in afterhours trading. By any reasonable measure, the firm posted a blowout quarter, with $2.4 billion in sales and $10.50 in diluted EPS comfortably edging our $2.3 billion and $8.35 forecasts, respectively. Importantly, the firm’s nearly 11% comparable store sales growth was balanced between check (7%) and traffic (4%), suggesting that despite double-digit price increases, the firm’s value proposition hasn’t yet outrun its core customer. Bolstered by moderating food costs and sales leverage, the Mexican fast casual chain also posted a restaurant-level margin beat, with a 25.6% figure healthily edging guidance of roughly 24% for the quarter.

Notably, management reinstated its annual comparable store sales growth guidance—calling for mid- to high-single-digit percentage growth in 2023. Despite our expectations for mean reversion in industry sales over the balance of the year, we view strong year-to-date traffic trends and modest full-year pricing as sufficient impetus to move our own estimates to 7.2% from 5.1% a quarter ago. We’ve also elected to raise our full-year restaurant margin target to 26.3% from 25.4%, with strong sales leverage and moderating food cost inflation catalyzing our revision.

Nevertheless, we remain cautious regarding the restaurant macroenvironment, with consumers spending an unusually high share of wallet despite declining savings rates and swelling credit balances, a tenuous equilibrium that we don’t view as enduring. That said, we believe that operators with strong digital capabilities and robust loyalty programs figure to outperform in an environment where consumers elect to rationalize restaurant spending, rendering Chipotle quite well-positioned relative to its fast casual competitive set.