Chipotle 2Q sales slowdown leads to stock sell-off
Chipotle Mexican Grill Inc. reported Thursday a 61-percent increase in profit during the second quarter despite a relative slowing in sales that the company blamed on a weak economy and reduced consumer spending.
The sales slowdown, which still resulted in a 21-percent gain in revenue and a same-store sales increase of 8 percent, was not as high as expectations, especially compared with Chipotle’s seven consecutive quarters of double-digit same-store sales increases.
The results, and Chipotle’s comments on the unsteady state of the consumer, led to a stock sell-off Friday morning. Chipotle’s stock fell more than 20 percent in early trading on the New York Stock Exchange, to $314.07 at 11 a.m. The company’s stock has traded between $271.53 and $442.40 during the past 52 weeks.
For the quarter ended June 30, Chipotle’s net income totaled $81.7 million, or $2.56 per share, compared with $50.7 million, or $1.59 per share, in the same quarter a year ago.
Revenue for the quarter totaled $690.9 million on a same-store sales increase of 8 percent. About 4.6 percent of the chain’s same-store sales jump was a result of menu price increases taken during 2011, as well as increased traffic, the company said.
“It’s not a significant slowdown, but it’s a slowdown,” Jack Hartung, Chipotle’s chief financial officer said. He cited “the slowing of the economy and reduced consumer spending.”
Hartung said sales trends began to slow in late April and continued into May and June. Similar trends have also continued into July, the start of the third quarter, he added.
Through the recession, Chipotle defied broader consumer trends, being one of the last restaurant chains to see sales fall when the economy soured and one of the first to recover, Hartung noted. Because of that, this year's second-quarter results faced tough comparisons with strong results over the past two years.
Still, Hartung said the company is expecting only mid-single-digit comparable sales growth for the rest of the year.
Some of the recent slowdown could be a result of loss of traffic to competitors that have beefed up marketing efforts, he said. However, Hartung noted, "It seems a general slowdown across the markets, across the days and across the hours."
Though commodity prices have been stable this year, Hartung said he expects pressure for the rest of the year and into the next — especially on items like dairy and chicken — as a result of lingering drought in the Midwest.
During the second quarter, Chipotle opened 55 new restaurants — including the chain’s first location in Paris and a third in London — bringing the chain’s total to 1,316 units.
For the first half of the year, Chipotle reported net income of $144.3 million, or $4.53 per share, compared with $97 million, or $3.06 per share, in the first half of 2011.
Revenue for the first six months rose 23 percent to $1.33 billion, reflecting a same-store sales increase of 10.2 percent.
Other items addressed during the call:
Federal investigation: Monty Moran, Chipotle’s co-chief executive, said the federal civil and criminal investigation of the chain’s immigration compliance practices is continuing, though it may be slowed by the appointment of a new U.S. Attorney General as lead investigator on the case.
Moran said he didn’t know if the change would be significant, but the investigator would likely need to “get up to speed.”
Chipotle is under investigation not only for possibly hiring undocumented workers, but also for the company’s disclosures regarding the investigation.
Throughput: Chipotle continued to improve throughput, with six more transactions per hour moving through the line during peak lunch hours.
Recruitment: The chain plans to hire area managers from outside the company despite a culture of developing such leaders from within.
Moran said team leaders are moving up the ranks rapidly, but hiring from outside would relieve some of the pressure on those internally developed managers as they take on oversight of more restaurants.
Food With Integrity: In addition to reaching the goal of serving sour cream only from pasture-raised dairy cattle during the quarter, Chipotle co-CEO Steve Ells said most restaurants are serving local produce this summer.