Chipotle Earnings: Strong Transaction Performance Outweighs Expected Inflation Headwinds

Wide-moat Chipotle CMG posted strong third-quarter results, with $2.47 billion in sales and $11.32 in diluted EPS beating our $2.46 billion and $10.26 estimates, respectively. The earnings outperformance is reflective of both better-than-expected comparable store sales (up 5% annually, against our 3.5% estimate) and slightly lower-than-expected food cost inflation. As we balance comparable sales outperformance, strong restaurant margins, and expectations for elevated prime cost inflation in 2024, we expect to raise our $1,720 fair value estimate for the Mexican food chain by a mid-single-digit percentage, leaving shares fairly valued.

More concretely, the firm’s 4% transaction volume growth suggests that its value proposition continues to resonate with customers, a particularly impressive result when considered against the industry’s 80-basis-point quarterly decline in traffic (Revenue Management Solutions). On balance, we agree with management that the brand’s unique combination of affordability, customizability, and perception of higher quality should partially insulate it from an uptick in promotional activity industrywide. Nevertheless, we continue to expect comparable sales growth to slow to 4% in 2024 from our 8% estimate for 2023 as consumers grow more judicious about discretionary spending.

On the margin side of the ledger, Chipotle’s restaurant margin of 26.3% edged our 25.5% forecast because of slowing food cost inflation and the firm’s comparable sales outperformance. We continue to view nearly 30% margins as attainable in the long-run, with mid-single-digit annual comparable store sales growth and select investments in automation driving midterm operating leverage. While we expect sticky inflation in 2024 in select food costs (notably beef) and hourly labor, particularly in California, we believe that the firm maintains the pricing power to offset the worst of the pressure—a view seemingly validated by Chipotle’s ongoing transaction share gains.