Despite wide-moat Chipotle’s (CMG) second-quarter results narrowly trailing our expectations ($2.21 billion in sales and $9.25 in earnings per share, against $2.26 billion and $9.50, respectively), we come away optimistic regarding the firm’s resilience amid challenging market conditions. Given the macroeconomic deterioration we’ve seen in the past quarter, with food costs now expected to remain elevated at least through the end of the year, deteriorating consumer confidence, and multiple months of declining real incomes, the stability of results was impressive. Critically, transaction volumes were up 3.5%-4.5% despite double-digit annual price increases, suggesting that Chipotle remains firmly ensconced in the consumer decision set even as pressure drives customers toward value-oriented fare. Nevertheless, as we balance a slowdown in industry traffic, some trade-down in response to another planned price increase in August, stronger second-half margins and a moderate drag on near-term unit growth due to tangled construction supply chains, we expect to increase our $1,530 fair value estimate by only 1%-2%, roughly in line with time value.
Also of note was management’s discussion of throughput, with the broad rollout of a new labor scheduling tool that better accounts for unit-level traffic trends and digital mix providing another near- to medium-term comparable sales lever, as the firm turns its attention toward achieving $3 million average unit volumes across the system. Coupled with strategic menu development around dessert and plant-based meats, operational improvements, learnings from the 29-million-member loyalty program and low-single-digit pricing, we view a route to comparable-store sales growth in excess of category inflation through 2031 as plausible, which should drive double-digit average annual sales growth (12%-13%) and roughly 20% equilibrium operating margins, in our view.
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