Image Source: Mike Mozart
Chipotle turned in impressively strong comparable restaurant sales growth in the fourth quarter of 2018, which included a surprise in comparable restaurant transaction growth, and digital sales continue to grow as a percentage of total sales as management emphasizes growth within the channel.
By Kris Rosemann
Shares of simulated Best Ideas Newsletter portfolio idea Chipotle (CMG) jumped in after-hours trading following the release of its fourth quarter earnings report February 6. Comparable restaurant sales growth came in at 6.1% on a year-over-year basis thanks to a 3.3% increase in menu prices and a 2% increase in comparable restaurant transactions. Digital sales jumped by nearly 66% from the year-ago period and accounted for 12.9% of total sales in the quarter, which is a notable increase from digital sales accounting for 11.2% of total sales in the third quarter of 2018. Total revenue growth in the period was a strong 10.4% on a year-over-year basis.
Menu price increases also helped boost Chipotle’s margin performance in the fourth quarter as food, beverage and packaging costs as a percentage of revenue fell by 100 basis points from the year-ago period as higher menu prices and lower avocado prices more than offset higher freight costs and paper and packaging inflation. Restaurant level operating margin expanded to 17% in the period from 14.9% in the comparable period of 2017 thanks to leverage from comps growth offsetting wage inflation and higher promotional and marketing spending. Adjusted diluted earnings per share came in at $1.72 in the fourth quarter, up from $1.55 in the year-ago period.
Free cash flow generation impressed at Chipotle in the full-year 2018 as well, as the metric jumped nearly 33% from 2017 levels to $334 million. Cash flow provided by operations and capital spending in the full-year period both advanced at a ~33% rate as the company opened 137 new restaurants in the year and closed or relocated 54. This strong free cash flow generation helped improve Chipotle’s already strong balance sheet, and it ended 2018 with roughly $250 million in cash and cash equivalents, which does not include ~$30 million in long-term restricted cash, and no debt on the books.
In 2019, management expects comparable restaurant sales growth to be in the mid-single digit range, and 140-155 new restaurant openings should help propel the top-line even higher. We cannot dispute CEO Brian Niccol’s confidence following a quarter of solid growth acceleration, which he attributes to relevant marketing of quality products, which are backed by great operations, and the provision of more convenient access. The company’s ability to drive growth via the digital channel is certainly noteworthy, and it continues to test new initiatives such as drive-thru lanes at some locations. However, it is worth noting that the company offered free delivery on any order worth $10 or more from December 18, 2018, through January 7, 2019, in its ‘Chipotle Free Delivery Bowl.’
Promotionally-driven or not, Chipotle’s fourth quarter performance was certainly impressive, and we’re quite pleased with the performance of this idea since highlighting it in the simulated Best Ideas Newsletter portfolio in late April 2018 when shares were trading in the ~$422 range, which indicates a ~25% gain since then before considering the post-quarterly report rally. We’re not making any changes to our fair value estimate at this time, but recent momentum in the business suggests that the upper bound of our fair value range ($610 per share) may be a reasonable estimate of its intrinsic value. We look forward to rolling the model forward once we the company’s 10-K is released, and we’re going to continue highlighting this idea in the simulated Best Ideas Newsletter portfolio.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.