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Chipotle improves throughput to pre-recession peak levels

Chipotle improves throughput to pre-recession peak levels

Chipotle Mexican Grill moved customers through its service line faster and more efficiently than ever before during the first quarter, indicating that company efforts to improve throughput are working, officials said Thursday.

After reporting a seventh consecutive quarter of double-digit same-store sales growth, company officials told analysts during a conference call that the chain has surpassed its goal of restoring transaction counts per hour to previous peak levels of 2007, something the company has been focused on since November.

During the quarter ended March 31, same-store sales during peak weekday lunch and dinner hours were growing faster than the rest of the day, said Monty Moran, Chipotle’s co-chief executive. “Our teams are now faster than they have ever been for this time of year,” he said.

Company efforts to improve throughput have included:

• Training employees to prepare “mise en place,” or having everything ready before peak hours begin

• Having “aces in their places,” or all staffers in position to serve guests

• Having an expediter, the person who stands between the last burrito wrapper and the cashier, in place during all peak hours to bag meals and allow the cashier to focus on cashing out

• Having a line backer in place, typically a general manager or service manager, who stands behind the line and makes sure pans are full of food, the line looks clean and workers have the tools they need without having to look away from guests

Moran said the company rolled out a video on throughput that demonstrates how a line should move and what a well-run team looks like. The video, taken at a busy downtown Chicago location, shows that effective throughput does not look frenetic, spastic or disorganized, but there are no wasted movements. If errors are made, they are caught quickly and corrected, and the workers appear calm, competent and have fun, he said.

The aim of these efforts is to get guests through the line efficiently, have team members make eye contact and communicate better with guests, and serve hotter and fresher food, noted Moran.

“Speed is not the first goal of throughput,” he said. “The first goal is to provide the very, very best customer service, with great eye contact, great communication, and a polite and efficient way with customers. All of those things, when done well, tend to lead to very, very fast service."

While the first quarter is typically the slowest time of year for Chipotle, Moran estimated that improvements to throughput added another five transactions to the peak lunch hour average of about 100 transactions during the quarter. That number may increase in the second quarter, which is traditionally busier for Chipotle, but Moran cautioned that increases in transactions may not directly impact same-store sales—at least, not immediately.

“That’s something that we believe, over time, will improve as a result of great throughput, but it’s not an immediate reaction,” he said. “If people want to come to Chipotle more often, we want to do all we can to reward that decision with an incredible guest experience, and a large part of that incredible guest experience is throughput.”

Steve Ells, Chipotle’s founder and co-chief executive, said the chain made another “significant leap” during the quarter in educating consumers about its commitment to quality ingredients from sustainable sources. The company will continue to expand on its “Cultivate” marketing platform, which will include day-long festivals planned for Denver and Chicago this year and other nontraditional efforts.

Chipotle will continue to focus on ingredients by making a series of food improvements. The company will add more whole wheat to tortillas to improve nutritional content and flavor, Ells said, and by the second quarter will only use sour cream sourced from pasture-raised cows. In addition, the company is trying out in Portland and New York an improved soft corn tortilla with a mix of white and yellow masa flour and is testing a new process for cooking beans to make them more consistent.

The company has two restaurants open in the U.K. and three more scheduled there before the end of the year. The first location in Paris is on track to open this spring, and a location in Toronto opened during the first quarter with two more planned there this year.

Contact Lisa Jennings at [email protected]
Follow her on Twitter: @livetodineout


Chipotle Mexican Grill, Inc. Looks Tasty After a Pullback

Investors weren't too pleased with Chipotle Mexican Grill's (NYSE:CMG) recent earnings report. While earnings per share grew 7.8% to $2.64, that fell short of the average analyst estimate of $2.86. As a result, shares fell about 6%. However, while Chipotle stock is up 50% year over year, this drop seems like a great buying opportunity.

Chipotle Mexican Grill 1-Year Stock Chart. Source: YCharts.

First of all, Chipotle generated unbelievable comparable-restaurant sales growth of 13.4% last quarter, in spite of bad weather. Second, the company is still growing its restaurant count by more than 10% annually, pushing revenue growth even higher. Third, Chipotle has the pricing power to win back the margins it lost due to cost inflation last quarter -- and it plans to implement a price increase very soon.

Efficiency hits a peak
A good portion of Chipotle's comparable-restaurant sales gain can be attributed to improvements in throughput -- the number of customers who can be served per hour. (An easy comparison to Q1 2013 also helped.) This allowed Chipotle restaurants to serve about seven extra customers during the peak lunch and dinner hours.

Chipotle's strong throughput performance bodes well for the next two quarters, which tend to be busier due to the favorable weather. Most Chipotle restaurants have long lines for several hours a day during the peak season, so faster throughput means that each restaurant can ultimately serve more customers.

Faster throughput helps Chipotle serve more customers at peak hours.

Comparable-restaurant sales gains are obviously good for revenue, but they also help Chipotle's profit margin by making better use of labor, occupancy, and capital expenses. Last quarter, labor costs fell from 23.6% to 23% of Chipotle's revenue occupancy costs fell from 6.6% to 6.1% of revenue, and depreciation and amortization expense fell from 3.2% to 2.8% of revenue.

Margin worries
Despite the good sales leverage on labor, occupancy, and depreciation/amortization costs, Chipotle's operating margin fell by 150 basis points last quarter. Food costs were the main culprit. Rapid cost increases for beef and dairy caused food, beverage, and packaging costs to move from 33% of sales to 34.5% of sales.

Furthermore, corporate general and administrative expenses soared more than 50% year over year, increasing from 6.1% of sales to 7.4% of sales. This was primarily caused by higher stock compensation expense.

Last week, many investors appeared to be spooked by Chipotle's margin issues. This was due in part to the rise in food costs last quarter, but management's forecast that food costs would rise even further in Q2 compounded these concerns. Investors seem to be worried that Chipotle can't raise prices fast enough to keep up with food cost inflation.

No reason to fear
These worries seem overblown to me. On the earnings call, Chipotle announced that it will implement mid-single-digit menu price increases starting later this quarter.

This alone will not move food costs back under 33%, a level seen as recently as 2012. However, the rapid price increases seen for items like beef (up 25% in just a few months) are likely to reverse eventually.

Chipotle plans to raise its prices starting later this quarter.

Moreover, the increase in menu prices should improve Chipotle's ability to leverage non-food costs, which represent about 50% of revenue. Obviously, it takes the same amount of labor and store overhead to serve the same burrito after its price goes up by 5%.

Lastly, the rise in G&A costs will slow dramatically later this year, largely because stock compensation expense is disproportionately weighted toward the first half of 2014. For the full year, G&A costs will increase by just 50 to 60 basis points over 2013. Part of this increase is due to the biennial All-Manager conference, which is held in even-numbered years and will therefore become a tailwind in 2015.

In sum, while Chipotle will probably have a tough Q2 margin-wise, it could see solid margin expansion in the second half of 2014 and 2015. It will benefit from higher prices, lower stock compensation expense, and potentially also from easing commodity costs. This will boost Chipotle's already-strong margin growth.

Foolish conclusion
For much of the past year, I have been wary of Chipotle stock, which seemed overpriced as it rose past $400, $500, and eventually $600. However, the company's ability to keep posting strong comparable-restaurant sales growth while adding nearly 200 restaurants a year -- and the recent stock price correction -- have changed my mind.

Chipotle stock is still pricey at more than 30 times forward earnings. This seems like a price worth paying, though. Chipotle has tremendous long-term growth prospects and enough pricing power to maintain or even improve its already-stellar profit margin over time. This is a recipe for great long-term investing returns.


Chipotle Mexican Grill, Inc. Looks Tasty After a Pullback

Investors weren't too pleased with Chipotle Mexican Grill's (NYSE:CMG) recent earnings report. While earnings per share grew 7.8% to $2.64, that fell short of the average analyst estimate of $2.86. As a result, shares fell about 6%. However, while Chipotle stock is up 50% year over year, this drop seems like a great buying opportunity.

Chipotle Mexican Grill 1-Year Stock Chart. Source: YCharts.

First of all, Chipotle generated unbelievable comparable-restaurant sales growth of 13.4% last quarter, in spite of bad weather. Second, the company is still growing its restaurant count by more than 10% annually, pushing revenue growth even higher. Third, Chipotle has the pricing power to win back the margins it lost due to cost inflation last quarter -- and it plans to implement a price increase very soon.

Efficiency hits a peak
A good portion of Chipotle's comparable-restaurant sales gain can be attributed to improvements in throughput -- the number of customers who can be served per hour. (An easy comparison to Q1 2013 also helped.) This allowed Chipotle restaurants to serve about seven extra customers during the peak lunch and dinner hours.

Chipotle's strong throughput performance bodes well for the next two quarters, which tend to be busier due to the favorable weather. Most Chipotle restaurants have long lines for several hours a day during the peak season, so faster throughput means that each restaurant can ultimately serve more customers.

Faster throughput helps Chipotle serve more customers at peak hours.

Comparable-restaurant sales gains are obviously good for revenue, but they also help Chipotle's profit margin by making better use of labor, occupancy, and capital expenses. Last quarter, labor costs fell from 23.6% to 23% of Chipotle's revenue occupancy costs fell from 6.6% to 6.1% of revenue, and depreciation and amortization expense fell from 3.2% to 2.8% of revenue.

Margin worries
Despite the good sales leverage on labor, occupancy, and depreciation/amortization costs, Chipotle's operating margin fell by 150 basis points last quarter. Food costs were the main culprit. Rapid cost increases for beef and dairy caused food, beverage, and packaging costs to move from 33% of sales to 34.5% of sales.

Furthermore, corporate general and administrative expenses soared more than 50% year over year, increasing from 6.1% of sales to 7.4% of sales. This was primarily caused by higher stock compensation expense.

Last week, many investors appeared to be spooked by Chipotle's margin issues. This was due in part to the rise in food costs last quarter, but management's forecast that food costs would rise even further in Q2 compounded these concerns. Investors seem to be worried that Chipotle can't raise prices fast enough to keep up with food cost inflation.

No reason to fear
These worries seem overblown to me. On the earnings call, Chipotle announced that it will implement mid-single-digit menu price increases starting later this quarter.

This alone will not move food costs back under 33%, a level seen as recently as 2012. However, the rapid price increases seen for items like beef (up 25% in just a few months) are likely to reverse eventually.

Chipotle plans to raise its prices starting later this quarter.

Moreover, the increase in menu prices should improve Chipotle's ability to leverage non-food costs, which represent about 50% of revenue. Obviously, it takes the same amount of labor and store overhead to serve the same burrito after its price goes up by 5%.

Lastly, the rise in G&A costs will slow dramatically later this year, largely because stock compensation expense is disproportionately weighted toward the first half of 2014. For the full year, G&A costs will increase by just 50 to 60 basis points over 2013. Part of this increase is due to the biennial All-Manager conference, which is held in even-numbered years and will therefore become a tailwind in 2015.

In sum, while Chipotle will probably have a tough Q2 margin-wise, it could see solid margin expansion in the second half of 2014 and 2015. It will benefit from higher prices, lower stock compensation expense, and potentially also from easing commodity costs. This will boost Chipotle's already-strong margin growth.

Foolish conclusion
For much of the past year, I have been wary of Chipotle stock, which seemed overpriced as it rose past $400, $500, and eventually $600. However, the company's ability to keep posting strong comparable-restaurant sales growth while adding nearly 200 restaurants a year -- and the recent stock price correction -- have changed my mind.

Chipotle stock is still pricey at more than 30 times forward earnings. This seems like a price worth paying, though. Chipotle has tremendous long-term growth prospects and enough pricing power to maintain or even improve its already-stellar profit margin over time. This is a recipe for great long-term investing returns.


Chipotle Mexican Grill, Inc. Looks Tasty After a Pullback

Investors weren't too pleased with Chipotle Mexican Grill's (NYSE:CMG) recent earnings report. While earnings per share grew 7.8% to $2.64, that fell short of the average analyst estimate of $2.86. As a result, shares fell about 6%. However, while Chipotle stock is up 50% year over year, this drop seems like a great buying opportunity.

Chipotle Mexican Grill 1-Year Stock Chart. Source: YCharts.

First of all, Chipotle generated unbelievable comparable-restaurant sales growth of 13.4% last quarter, in spite of bad weather. Second, the company is still growing its restaurant count by more than 10% annually, pushing revenue growth even higher. Third, Chipotle has the pricing power to win back the margins it lost due to cost inflation last quarter -- and it plans to implement a price increase very soon.

Efficiency hits a peak
A good portion of Chipotle's comparable-restaurant sales gain can be attributed to improvements in throughput -- the number of customers who can be served per hour. (An easy comparison to Q1 2013 also helped.) This allowed Chipotle restaurants to serve about seven extra customers during the peak lunch and dinner hours.

Chipotle's strong throughput performance bodes well for the next two quarters, which tend to be busier due to the favorable weather. Most Chipotle restaurants have long lines for several hours a day during the peak season, so faster throughput means that each restaurant can ultimately serve more customers.

Faster throughput helps Chipotle serve more customers at peak hours.

Comparable-restaurant sales gains are obviously good for revenue, but they also help Chipotle's profit margin by making better use of labor, occupancy, and capital expenses. Last quarter, labor costs fell from 23.6% to 23% of Chipotle's revenue occupancy costs fell from 6.6% to 6.1% of revenue, and depreciation and amortization expense fell from 3.2% to 2.8% of revenue.

Margin worries
Despite the good sales leverage on labor, occupancy, and depreciation/amortization costs, Chipotle's operating margin fell by 150 basis points last quarter. Food costs were the main culprit. Rapid cost increases for beef and dairy caused food, beverage, and packaging costs to move from 33% of sales to 34.5% of sales.

Furthermore, corporate general and administrative expenses soared more than 50% year over year, increasing from 6.1% of sales to 7.4% of sales. This was primarily caused by higher stock compensation expense.

Last week, many investors appeared to be spooked by Chipotle's margin issues. This was due in part to the rise in food costs last quarter, but management's forecast that food costs would rise even further in Q2 compounded these concerns. Investors seem to be worried that Chipotle can't raise prices fast enough to keep up with food cost inflation.

No reason to fear
These worries seem overblown to me. On the earnings call, Chipotle announced that it will implement mid-single-digit menu price increases starting later this quarter.

This alone will not move food costs back under 33%, a level seen as recently as 2012. However, the rapid price increases seen for items like beef (up 25% in just a few months) are likely to reverse eventually.

Chipotle plans to raise its prices starting later this quarter.

Moreover, the increase in menu prices should improve Chipotle's ability to leverage non-food costs, which represent about 50% of revenue. Obviously, it takes the same amount of labor and store overhead to serve the same burrito after its price goes up by 5%.

Lastly, the rise in G&A costs will slow dramatically later this year, largely because stock compensation expense is disproportionately weighted toward the first half of 2014. For the full year, G&A costs will increase by just 50 to 60 basis points over 2013. Part of this increase is due to the biennial All-Manager conference, which is held in even-numbered years and will therefore become a tailwind in 2015.

In sum, while Chipotle will probably have a tough Q2 margin-wise, it could see solid margin expansion in the second half of 2014 and 2015. It will benefit from higher prices, lower stock compensation expense, and potentially also from easing commodity costs. This will boost Chipotle's already-strong margin growth.

Foolish conclusion
For much of the past year, I have been wary of Chipotle stock, which seemed overpriced as it rose past $400, $500, and eventually $600. However, the company's ability to keep posting strong comparable-restaurant sales growth while adding nearly 200 restaurants a year -- and the recent stock price correction -- have changed my mind.

Chipotle stock is still pricey at more than 30 times forward earnings. This seems like a price worth paying, though. Chipotle has tremendous long-term growth prospects and enough pricing power to maintain or even improve its already-stellar profit margin over time. This is a recipe for great long-term investing returns.


Chipotle Mexican Grill, Inc. Looks Tasty After a Pullback

Investors weren't too pleased with Chipotle Mexican Grill's (NYSE:CMG) recent earnings report. While earnings per share grew 7.8% to $2.64, that fell short of the average analyst estimate of $2.86. As a result, shares fell about 6%. However, while Chipotle stock is up 50% year over year, this drop seems like a great buying opportunity.

Chipotle Mexican Grill 1-Year Stock Chart. Source: YCharts.

First of all, Chipotle generated unbelievable comparable-restaurant sales growth of 13.4% last quarter, in spite of bad weather. Second, the company is still growing its restaurant count by more than 10% annually, pushing revenue growth even higher. Third, Chipotle has the pricing power to win back the margins it lost due to cost inflation last quarter -- and it plans to implement a price increase very soon.

Efficiency hits a peak
A good portion of Chipotle's comparable-restaurant sales gain can be attributed to improvements in throughput -- the number of customers who can be served per hour. (An easy comparison to Q1 2013 also helped.) This allowed Chipotle restaurants to serve about seven extra customers during the peak lunch and dinner hours.

Chipotle's strong throughput performance bodes well for the next two quarters, which tend to be busier due to the favorable weather. Most Chipotle restaurants have long lines for several hours a day during the peak season, so faster throughput means that each restaurant can ultimately serve more customers.

Faster throughput helps Chipotle serve more customers at peak hours.

Comparable-restaurant sales gains are obviously good for revenue, but they also help Chipotle's profit margin by making better use of labor, occupancy, and capital expenses. Last quarter, labor costs fell from 23.6% to 23% of Chipotle's revenue occupancy costs fell from 6.6% to 6.1% of revenue, and depreciation and amortization expense fell from 3.2% to 2.8% of revenue.

Margin worries
Despite the good sales leverage on labor, occupancy, and depreciation/amortization costs, Chipotle's operating margin fell by 150 basis points last quarter. Food costs were the main culprit. Rapid cost increases for beef and dairy caused food, beverage, and packaging costs to move from 33% of sales to 34.5% of sales.

Furthermore, corporate general and administrative expenses soared more than 50% year over year, increasing from 6.1% of sales to 7.4% of sales. This was primarily caused by higher stock compensation expense.

Last week, many investors appeared to be spooked by Chipotle's margin issues. This was due in part to the rise in food costs last quarter, but management's forecast that food costs would rise even further in Q2 compounded these concerns. Investors seem to be worried that Chipotle can't raise prices fast enough to keep up with food cost inflation.

No reason to fear
These worries seem overblown to me. On the earnings call, Chipotle announced that it will implement mid-single-digit menu price increases starting later this quarter.

This alone will not move food costs back under 33%, a level seen as recently as 2012. However, the rapid price increases seen for items like beef (up 25% in just a few months) are likely to reverse eventually.

Chipotle plans to raise its prices starting later this quarter.

Moreover, the increase in menu prices should improve Chipotle's ability to leverage non-food costs, which represent about 50% of revenue. Obviously, it takes the same amount of labor and store overhead to serve the same burrito after its price goes up by 5%.

Lastly, the rise in G&A costs will slow dramatically later this year, largely because stock compensation expense is disproportionately weighted toward the first half of 2014. For the full year, G&A costs will increase by just 50 to 60 basis points over 2013. Part of this increase is due to the biennial All-Manager conference, which is held in even-numbered years and will therefore become a tailwind in 2015.

In sum, while Chipotle will probably have a tough Q2 margin-wise, it could see solid margin expansion in the second half of 2014 and 2015. It will benefit from higher prices, lower stock compensation expense, and potentially also from easing commodity costs. This will boost Chipotle's already-strong margin growth.

Foolish conclusion
For much of the past year, I have been wary of Chipotle stock, which seemed overpriced as it rose past $400, $500, and eventually $600. However, the company's ability to keep posting strong comparable-restaurant sales growth while adding nearly 200 restaurants a year -- and the recent stock price correction -- have changed my mind.

Chipotle stock is still pricey at more than 30 times forward earnings. This seems like a price worth paying, though. Chipotle has tremendous long-term growth prospects and enough pricing power to maintain or even improve its already-stellar profit margin over time. This is a recipe for great long-term investing returns.


Chipotle Mexican Grill, Inc. Looks Tasty After a Pullback

Investors weren't too pleased with Chipotle Mexican Grill's (NYSE:CMG) recent earnings report. While earnings per share grew 7.8% to $2.64, that fell short of the average analyst estimate of $2.86. As a result, shares fell about 6%. However, while Chipotle stock is up 50% year over year, this drop seems like a great buying opportunity.

Chipotle Mexican Grill 1-Year Stock Chart. Source: YCharts.

First of all, Chipotle generated unbelievable comparable-restaurant sales growth of 13.4% last quarter, in spite of bad weather. Second, the company is still growing its restaurant count by more than 10% annually, pushing revenue growth even higher. Third, Chipotle has the pricing power to win back the margins it lost due to cost inflation last quarter -- and it plans to implement a price increase very soon.

Efficiency hits a peak
A good portion of Chipotle's comparable-restaurant sales gain can be attributed to improvements in throughput -- the number of customers who can be served per hour. (An easy comparison to Q1 2013 also helped.) This allowed Chipotle restaurants to serve about seven extra customers during the peak lunch and dinner hours.

Chipotle's strong throughput performance bodes well for the next two quarters, which tend to be busier due to the favorable weather. Most Chipotle restaurants have long lines for several hours a day during the peak season, so faster throughput means that each restaurant can ultimately serve more customers.

Faster throughput helps Chipotle serve more customers at peak hours.

Comparable-restaurant sales gains are obviously good for revenue, but they also help Chipotle's profit margin by making better use of labor, occupancy, and capital expenses. Last quarter, labor costs fell from 23.6% to 23% of Chipotle's revenue occupancy costs fell from 6.6% to 6.1% of revenue, and depreciation and amortization expense fell from 3.2% to 2.8% of revenue.

Margin worries
Despite the good sales leverage on labor, occupancy, and depreciation/amortization costs, Chipotle's operating margin fell by 150 basis points last quarter. Food costs were the main culprit. Rapid cost increases for beef and dairy caused food, beverage, and packaging costs to move from 33% of sales to 34.5% of sales.

Furthermore, corporate general and administrative expenses soared more than 50% year over year, increasing from 6.1% of sales to 7.4% of sales. This was primarily caused by higher stock compensation expense.

Last week, many investors appeared to be spooked by Chipotle's margin issues. This was due in part to the rise in food costs last quarter, but management's forecast that food costs would rise even further in Q2 compounded these concerns. Investors seem to be worried that Chipotle can't raise prices fast enough to keep up with food cost inflation.

No reason to fear
These worries seem overblown to me. On the earnings call, Chipotle announced that it will implement mid-single-digit menu price increases starting later this quarter.

This alone will not move food costs back under 33%, a level seen as recently as 2012. However, the rapid price increases seen for items like beef (up 25% in just a few months) are likely to reverse eventually.

Chipotle plans to raise its prices starting later this quarter.

Moreover, the increase in menu prices should improve Chipotle's ability to leverage non-food costs, which represent about 50% of revenue. Obviously, it takes the same amount of labor and store overhead to serve the same burrito after its price goes up by 5%.

Lastly, the rise in G&A costs will slow dramatically later this year, largely because stock compensation expense is disproportionately weighted toward the first half of 2014. For the full year, G&A costs will increase by just 50 to 60 basis points over 2013. Part of this increase is due to the biennial All-Manager conference, which is held in even-numbered years and will therefore become a tailwind in 2015.

In sum, while Chipotle will probably have a tough Q2 margin-wise, it could see solid margin expansion in the second half of 2014 and 2015. It will benefit from higher prices, lower stock compensation expense, and potentially also from easing commodity costs. This will boost Chipotle's already-strong margin growth.

Foolish conclusion
For much of the past year, I have been wary of Chipotle stock, which seemed overpriced as it rose past $400, $500, and eventually $600. However, the company's ability to keep posting strong comparable-restaurant sales growth while adding nearly 200 restaurants a year -- and the recent stock price correction -- have changed my mind.

Chipotle stock is still pricey at more than 30 times forward earnings. This seems like a price worth paying, though. Chipotle has tremendous long-term growth prospects and enough pricing power to maintain or even improve its already-stellar profit margin over time. This is a recipe for great long-term investing returns.


Chipotle Mexican Grill, Inc. Looks Tasty After a Pullback

Investors weren't too pleased with Chipotle Mexican Grill's (NYSE:CMG) recent earnings report. While earnings per share grew 7.8% to $2.64, that fell short of the average analyst estimate of $2.86. As a result, shares fell about 6%. However, while Chipotle stock is up 50% year over year, this drop seems like a great buying opportunity.

Chipotle Mexican Grill 1-Year Stock Chart. Source: YCharts.

First of all, Chipotle generated unbelievable comparable-restaurant sales growth of 13.4% last quarter, in spite of bad weather. Second, the company is still growing its restaurant count by more than 10% annually, pushing revenue growth even higher. Third, Chipotle has the pricing power to win back the margins it lost due to cost inflation last quarter -- and it plans to implement a price increase very soon.

Efficiency hits a peak
A good portion of Chipotle's comparable-restaurant sales gain can be attributed to improvements in throughput -- the number of customers who can be served per hour. (An easy comparison to Q1 2013 also helped.) This allowed Chipotle restaurants to serve about seven extra customers during the peak lunch and dinner hours.

Chipotle's strong throughput performance bodes well for the next two quarters, which tend to be busier due to the favorable weather. Most Chipotle restaurants have long lines for several hours a day during the peak season, so faster throughput means that each restaurant can ultimately serve more customers.

Faster throughput helps Chipotle serve more customers at peak hours.

Comparable-restaurant sales gains are obviously good for revenue, but they also help Chipotle's profit margin by making better use of labor, occupancy, and capital expenses. Last quarter, labor costs fell from 23.6% to 23% of Chipotle's revenue occupancy costs fell from 6.6% to 6.1% of revenue, and depreciation and amortization expense fell from 3.2% to 2.8% of revenue.

Margin worries
Despite the good sales leverage on labor, occupancy, and depreciation/amortization costs, Chipotle's operating margin fell by 150 basis points last quarter. Food costs were the main culprit. Rapid cost increases for beef and dairy caused food, beverage, and packaging costs to move from 33% of sales to 34.5% of sales.

Furthermore, corporate general and administrative expenses soared more than 50% year over year, increasing from 6.1% of sales to 7.4% of sales. This was primarily caused by higher stock compensation expense.

Last week, many investors appeared to be spooked by Chipotle's margin issues. This was due in part to the rise in food costs last quarter, but management's forecast that food costs would rise even further in Q2 compounded these concerns. Investors seem to be worried that Chipotle can't raise prices fast enough to keep up with food cost inflation.

No reason to fear
These worries seem overblown to me. On the earnings call, Chipotle announced that it will implement mid-single-digit menu price increases starting later this quarter.

This alone will not move food costs back under 33%, a level seen as recently as 2012. However, the rapid price increases seen for items like beef (up 25% in just a few months) are likely to reverse eventually.

Chipotle plans to raise its prices starting later this quarter.

Moreover, the increase in menu prices should improve Chipotle's ability to leverage non-food costs, which represent about 50% of revenue. Obviously, it takes the same amount of labor and store overhead to serve the same burrito after its price goes up by 5%.

Lastly, the rise in G&A costs will slow dramatically later this year, largely because stock compensation expense is disproportionately weighted toward the first half of 2014. For the full year, G&A costs will increase by just 50 to 60 basis points over 2013. Part of this increase is due to the biennial All-Manager conference, which is held in even-numbered years and will therefore become a tailwind in 2015.

In sum, while Chipotle will probably have a tough Q2 margin-wise, it could see solid margin expansion in the second half of 2014 and 2015. It will benefit from higher prices, lower stock compensation expense, and potentially also from easing commodity costs. This will boost Chipotle's already-strong margin growth.

Foolish conclusion
For much of the past year, I have been wary of Chipotle stock, which seemed overpriced as it rose past $400, $500, and eventually $600. However, the company's ability to keep posting strong comparable-restaurant sales growth while adding nearly 200 restaurants a year -- and the recent stock price correction -- have changed my mind.

Chipotle stock is still pricey at more than 30 times forward earnings. This seems like a price worth paying, though. Chipotle has tremendous long-term growth prospects and enough pricing power to maintain or even improve its already-stellar profit margin over time. This is a recipe for great long-term investing returns.


Chipotle Mexican Grill, Inc. Looks Tasty After a Pullback

Investors weren't too pleased with Chipotle Mexican Grill's (NYSE:CMG) recent earnings report. While earnings per share grew 7.8% to $2.64, that fell short of the average analyst estimate of $2.86. As a result, shares fell about 6%. However, while Chipotle stock is up 50% year over year, this drop seems like a great buying opportunity.

Chipotle Mexican Grill 1-Year Stock Chart. Source: YCharts.

First of all, Chipotle generated unbelievable comparable-restaurant sales growth of 13.4% last quarter, in spite of bad weather. Second, the company is still growing its restaurant count by more than 10% annually, pushing revenue growth even higher. Third, Chipotle has the pricing power to win back the margins it lost due to cost inflation last quarter -- and it plans to implement a price increase very soon.

Efficiency hits a peak
A good portion of Chipotle's comparable-restaurant sales gain can be attributed to improvements in throughput -- the number of customers who can be served per hour. (An easy comparison to Q1 2013 also helped.) This allowed Chipotle restaurants to serve about seven extra customers during the peak lunch and dinner hours.

Chipotle's strong throughput performance bodes well for the next two quarters, which tend to be busier due to the favorable weather. Most Chipotle restaurants have long lines for several hours a day during the peak season, so faster throughput means that each restaurant can ultimately serve more customers.

Faster throughput helps Chipotle serve more customers at peak hours.

Comparable-restaurant sales gains are obviously good for revenue, but they also help Chipotle's profit margin by making better use of labor, occupancy, and capital expenses. Last quarter, labor costs fell from 23.6% to 23% of Chipotle's revenue occupancy costs fell from 6.6% to 6.1% of revenue, and depreciation and amortization expense fell from 3.2% to 2.8% of revenue.

Margin worries
Despite the good sales leverage on labor, occupancy, and depreciation/amortization costs, Chipotle's operating margin fell by 150 basis points last quarter. Food costs were the main culprit. Rapid cost increases for beef and dairy caused food, beverage, and packaging costs to move from 33% of sales to 34.5% of sales.

Furthermore, corporate general and administrative expenses soared more than 50% year over year, increasing from 6.1% of sales to 7.4% of sales. This was primarily caused by higher stock compensation expense.

Last week, many investors appeared to be spooked by Chipotle's margin issues. This was due in part to the rise in food costs last quarter, but management's forecast that food costs would rise even further in Q2 compounded these concerns. Investors seem to be worried that Chipotle can't raise prices fast enough to keep up with food cost inflation.

No reason to fear
These worries seem overblown to me. On the earnings call, Chipotle announced that it will implement mid-single-digit menu price increases starting later this quarter.

This alone will not move food costs back under 33%, a level seen as recently as 2012. However, the rapid price increases seen for items like beef (up 25% in just a few months) are likely to reverse eventually.

Chipotle plans to raise its prices starting later this quarter.

Moreover, the increase in menu prices should improve Chipotle's ability to leverage non-food costs, which represent about 50% of revenue. Obviously, it takes the same amount of labor and store overhead to serve the same burrito after its price goes up by 5%.

Lastly, the rise in G&A costs will slow dramatically later this year, largely because stock compensation expense is disproportionately weighted toward the first half of 2014. For the full year, G&A costs will increase by just 50 to 60 basis points over 2013. Part of this increase is due to the biennial All-Manager conference, which is held in even-numbered years and will therefore become a tailwind in 2015.

In sum, while Chipotle will probably have a tough Q2 margin-wise, it could see solid margin expansion in the second half of 2014 and 2015. It will benefit from higher prices, lower stock compensation expense, and potentially also from easing commodity costs. This will boost Chipotle's already-strong margin growth.

Foolish conclusion
For much of the past year, I have been wary of Chipotle stock, which seemed overpriced as it rose past $400, $500, and eventually $600. However, the company's ability to keep posting strong comparable-restaurant sales growth while adding nearly 200 restaurants a year -- and the recent stock price correction -- have changed my mind.

Chipotle stock is still pricey at more than 30 times forward earnings. This seems like a price worth paying, though. Chipotle has tremendous long-term growth prospects and enough pricing power to maintain or even improve its already-stellar profit margin over time. This is a recipe for great long-term investing returns.


Chipotle Mexican Grill, Inc. Looks Tasty After a Pullback

Investors weren't too pleased with Chipotle Mexican Grill's (NYSE:CMG) recent earnings report. While earnings per share grew 7.8% to $2.64, that fell short of the average analyst estimate of $2.86. As a result, shares fell about 6%. However, while Chipotle stock is up 50% year over year, this drop seems like a great buying opportunity.

Chipotle Mexican Grill 1-Year Stock Chart. Source: YCharts.

First of all, Chipotle generated unbelievable comparable-restaurant sales growth of 13.4% last quarter, in spite of bad weather. Second, the company is still growing its restaurant count by more than 10% annually, pushing revenue growth even higher. Third, Chipotle has the pricing power to win back the margins it lost due to cost inflation last quarter -- and it plans to implement a price increase very soon.

Efficiency hits a peak
A good portion of Chipotle's comparable-restaurant sales gain can be attributed to improvements in throughput -- the number of customers who can be served per hour. (An easy comparison to Q1 2013 also helped.) This allowed Chipotle restaurants to serve about seven extra customers during the peak lunch and dinner hours.

Chipotle's strong throughput performance bodes well for the next two quarters, which tend to be busier due to the favorable weather. Most Chipotle restaurants have long lines for several hours a day during the peak season, so faster throughput means that each restaurant can ultimately serve more customers.

Faster throughput helps Chipotle serve more customers at peak hours.

Comparable-restaurant sales gains are obviously good for revenue, but they also help Chipotle's profit margin by making better use of labor, occupancy, and capital expenses. Last quarter, labor costs fell from 23.6% to 23% of Chipotle's revenue occupancy costs fell from 6.6% to 6.1% of revenue, and depreciation and amortization expense fell from 3.2% to 2.8% of revenue.

Margin worries
Despite the good sales leverage on labor, occupancy, and depreciation/amortization costs, Chipotle's operating margin fell by 150 basis points last quarter. Food costs were the main culprit. Rapid cost increases for beef and dairy caused food, beverage, and packaging costs to move from 33% of sales to 34.5% of sales.

Furthermore, corporate general and administrative expenses soared more than 50% year over year, increasing from 6.1% of sales to 7.4% of sales. This was primarily caused by higher stock compensation expense.

Last week, many investors appeared to be spooked by Chipotle's margin issues. This was due in part to the rise in food costs last quarter, but management's forecast that food costs would rise even further in Q2 compounded these concerns. Investors seem to be worried that Chipotle can't raise prices fast enough to keep up with food cost inflation.

No reason to fear
These worries seem overblown to me. On the earnings call, Chipotle announced that it will implement mid-single-digit menu price increases starting later this quarter.

This alone will not move food costs back under 33%, a level seen as recently as 2012. However, the rapid price increases seen for items like beef (up 25% in just a few months) are likely to reverse eventually.

Chipotle plans to raise its prices starting later this quarter.

Moreover, the increase in menu prices should improve Chipotle's ability to leverage non-food costs, which represent about 50% of revenue. Obviously, it takes the same amount of labor and store overhead to serve the same burrito after its price goes up by 5%.

Lastly, the rise in G&A costs will slow dramatically later this year, largely because stock compensation expense is disproportionately weighted toward the first half of 2014. For the full year, G&A costs will increase by just 50 to 60 basis points over 2013. Part of this increase is due to the biennial All-Manager conference, which is held in even-numbered years and will therefore become a tailwind in 2015.

In sum, while Chipotle will probably have a tough Q2 margin-wise, it could see solid margin expansion in the second half of 2014 and 2015. It will benefit from higher prices, lower stock compensation expense, and potentially also from easing commodity costs. This will boost Chipotle's already-strong margin growth.

Foolish conclusion
For much of the past year, I have been wary of Chipotle stock, which seemed overpriced as it rose past $400, $500, and eventually $600. However, the company's ability to keep posting strong comparable-restaurant sales growth while adding nearly 200 restaurants a year -- and the recent stock price correction -- have changed my mind.

Chipotle stock is still pricey at more than 30 times forward earnings. This seems like a price worth paying, though. Chipotle has tremendous long-term growth prospects and enough pricing power to maintain or even improve its already-stellar profit margin over time. This is a recipe for great long-term investing returns.


Chipotle Mexican Grill, Inc. Looks Tasty After a Pullback

Investors weren't too pleased with Chipotle Mexican Grill's (NYSE:CMG) recent earnings report. While earnings per share grew 7.8% to $2.64, that fell short of the average analyst estimate of $2.86. As a result, shares fell about 6%. However, while Chipotle stock is up 50% year over year, this drop seems like a great buying opportunity.

Chipotle Mexican Grill 1-Year Stock Chart. Source: YCharts.

First of all, Chipotle generated unbelievable comparable-restaurant sales growth of 13.4% last quarter, in spite of bad weather. Second, the company is still growing its restaurant count by more than 10% annually, pushing revenue growth even higher. Third, Chipotle has the pricing power to win back the margins it lost due to cost inflation last quarter -- and it plans to implement a price increase very soon.

Efficiency hits a peak
A good portion of Chipotle's comparable-restaurant sales gain can be attributed to improvements in throughput -- the number of customers who can be served per hour. (An easy comparison to Q1 2013 also helped.) This allowed Chipotle restaurants to serve about seven extra customers during the peak lunch and dinner hours.

Chipotle's strong throughput performance bodes well for the next two quarters, which tend to be busier due to the favorable weather. Most Chipotle restaurants have long lines for several hours a day during the peak season, so faster throughput means that each restaurant can ultimately serve more customers.

Faster throughput helps Chipotle serve more customers at peak hours.

Comparable-restaurant sales gains are obviously good for revenue, but they also help Chipotle's profit margin by making better use of labor, occupancy, and capital expenses. Last quarter, labor costs fell from 23.6% to 23% of Chipotle's revenue occupancy costs fell from 6.6% to 6.1% of revenue, and depreciation and amortization expense fell from 3.2% to 2.8% of revenue.

Margin worries
Despite the good sales leverage on labor, occupancy, and depreciation/amortization costs, Chipotle's operating margin fell by 150 basis points last quarter. Food costs were the main culprit. Rapid cost increases for beef and dairy caused food, beverage, and packaging costs to move from 33% of sales to 34.5% of sales.

Furthermore, corporate general and administrative expenses soared more than 50% year over year, increasing from 6.1% of sales to 7.4% of sales. This was primarily caused by higher stock compensation expense.

Last week, many investors appeared to be spooked by Chipotle's margin issues. This was due in part to the rise in food costs last quarter, but management's forecast that food costs would rise even further in Q2 compounded these concerns. Investors seem to be worried that Chipotle can't raise prices fast enough to keep up with food cost inflation.

No reason to fear
These worries seem overblown to me. On the earnings call, Chipotle announced that it will implement mid-single-digit menu price increases starting later this quarter.

This alone will not move food costs back under 33%, a level seen as recently as 2012. However, the rapid price increases seen for items like beef (up 25% in just a few months) are likely to reverse eventually.

Chipotle plans to raise its prices starting later this quarter.

Moreover, the increase in menu prices should improve Chipotle's ability to leverage non-food costs, which represent about 50% of revenue. Obviously, it takes the same amount of labor and store overhead to serve the same burrito after its price goes up by 5%.

Lastly, the rise in G&A costs will slow dramatically later this year, largely because stock compensation expense is disproportionately weighted toward the first half of 2014. For the full year, G&A costs will increase by just 50 to 60 basis points over 2013. Part of this increase is due to the biennial All-Manager conference, which is held in even-numbered years and will therefore become a tailwind in 2015.

In sum, while Chipotle will probably have a tough Q2 margin-wise, it could see solid margin expansion in the second half of 2014 and 2015. It will benefit from higher prices, lower stock compensation expense, and potentially also from easing commodity costs. This will boost Chipotle's already-strong margin growth.

Foolish conclusion
For much of the past year, I have been wary of Chipotle stock, which seemed overpriced as it rose past $400, $500, and eventually $600. However, the company's ability to keep posting strong comparable-restaurant sales growth while adding nearly 200 restaurants a year -- and the recent stock price correction -- have changed my mind.

Chipotle stock is still pricey at more than 30 times forward earnings. This seems like a price worth paying, though. Chipotle has tremendous long-term growth prospects and enough pricing power to maintain or even improve its already-stellar profit margin over time. This is a recipe for great long-term investing returns.


Chipotle Mexican Grill, Inc. Looks Tasty After a Pullback

Investors weren't too pleased with Chipotle Mexican Grill's (NYSE:CMG) recent earnings report. While earnings per share grew 7.8% to $2.64, that fell short of the average analyst estimate of $2.86. As a result, shares fell about 6%. However, while Chipotle stock is up 50% year over year, this drop seems like a great buying opportunity.

Chipotle Mexican Grill 1-Year Stock Chart. Source: YCharts.

First of all, Chipotle generated unbelievable comparable-restaurant sales growth of 13.4% last quarter, in spite of bad weather. Second, the company is still growing its restaurant count by more than 10% annually, pushing revenue growth even higher. Third, Chipotle has the pricing power to win back the margins it lost due to cost inflation last quarter -- and it plans to implement a price increase very soon.

Efficiency hits a peak
A good portion of Chipotle's comparable-restaurant sales gain can be attributed to improvements in throughput -- the number of customers who can be served per hour. (An easy comparison to Q1 2013 also helped.) This allowed Chipotle restaurants to serve about seven extra customers during the peak lunch and dinner hours.

Chipotle's strong throughput performance bodes well for the next two quarters, which tend to be busier due to the favorable weather. Most Chipotle restaurants have long lines for several hours a day during the peak season, so faster throughput means that each restaurant can ultimately serve more customers.

Faster throughput helps Chipotle serve more customers at peak hours.

Comparable-restaurant sales gains are obviously good for revenue, but they also help Chipotle's profit margin by making better use of labor, occupancy, and capital expenses. Last quarter, labor costs fell from 23.6% to 23% of Chipotle's revenue occupancy costs fell from 6.6% to 6.1% of revenue, and depreciation and amortization expense fell from 3.2% to 2.8% of revenue.

Margin worries
Despite the good sales leverage on labor, occupancy, and depreciation/amortization costs, Chipotle's operating margin fell by 150 basis points last quarter. Food costs were the main culprit. Rapid cost increases for beef and dairy caused food, beverage, and packaging costs to move from 33% of sales to 34.5% of sales.

Furthermore, corporate general and administrative expenses soared more than 50% year over year, increasing from 6.1% of sales to 7.4% of sales. This was primarily caused by higher stock compensation expense.

Last week, many investors appeared to be spooked by Chipotle's margin issues. This was due in part to the rise in food costs last quarter, but management's forecast that food costs would rise even further in Q2 compounded these concerns. Investors seem to be worried that Chipotle can't raise prices fast enough to keep up with food cost inflation.

No reason to fear
These worries seem overblown to me. On the earnings call, Chipotle announced that it will implement mid-single-digit menu price increases starting later this quarter.

This alone will not move food costs back under 33%, a level seen as recently as 2012. However, the rapid price increases seen for items like beef (up 25% in just a few months) are likely to reverse eventually.

Chipotle plans to raise its prices starting later this quarter.

Moreover, the increase in menu prices should improve Chipotle's ability to leverage non-food costs, which represent about 50% of revenue. Obviously, it takes the same amount of labor and store overhead to serve the same burrito after its price goes up by 5%.

Lastly, the rise in G&A costs will slow dramatically later this year, largely because stock compensation expense is disproportionately weighted toward the first half of 2014. For the full year, G&A costs will increase by just 50 to 60 basis points over 2013. Part of this increase is due to the biennial All-Manager conference, which is held in even-numbered years and will therefore become a tailwind in 2015.

In sum, while Chipotle will probably have a tough Q2 margin-wise, it could see solid margin expansion in the second half of 2014 and 2015. It will benefit from higher prices, lower stock compensation expense, and potentially also from easing commodity costs. This will boost Chipotle's already-strong margin growth.

Foolish conclusion
For much of the past year, I have been wary of Chipotle stock, which seemed overpriced as it rose past $400, $500, and eventually $600. However, the company's ability to keep posting strong comparable-restaurant sales growth while adding nearly 200 restaurants a year -- and the recent stock price correction -- have changed my mind.

Chipotle stock is still pricey at more than 30 times forward earnings. This seems like a price worth paying, though. Chipotle has tremendous long-term growth prospects and enough pricing power to maintain or even improve its already-stellar profit margin over time. This is a recipe for great long-term investing returns.