Chipotle: 'We took our eye off the ball'

by Monica Watrous
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Chipotle's sales growth slows significantly on tough prior-year comparisons and 'choppy' traffic.

DENVER — Citing “choppy” traffic and tough comparisons to last year’s strong results, Chipotle Mexican Grill, Inc. is “just kind of holding our own,” said Jack Hartung, chief financial officer.

Jack Hartung, c.f.o. of Chipotle

“I don’t think we’re decelerating, but I don’t see us accelerating either,” Mr. Hartung said during an Oct. 20 earnings call with financial analysts.

For the third quarter ended Sept. 30, Chipotle had net income of $144,883,000, equal to $4.65 per share on the common stock, up 11% from $130,801,000, or $4.22, for the prior-year period. Revenue advanced 12% to $1,216,890,000 from year-ago revenue of $1,084,222,000.

Even with a buy-one-get-one promotion during the quarter, comparable sales growth slowed to 2.6%, and management now expects low-to-mid single digit increases for the full year and low-single digit increases next year. This follows a robust performance in fiscal 2014, when comparable restaurant sales increased 17%.

Chipotle’s sales were hurt this year by a shortage of carnitas in more than a third of its restaurants, after the chain suspended a pork supplier that was not meeting the company’s animal welfare standards. But slower throughput also may have contributed to a decline in transactions during the quarter, said Monty Moran, co-chief executive officer.

Monty Moran, co-c.e.o. of Chipotle

“I think we took our eye off the ball a little bit,” Mr. Moran said. “I think it happens sometimes, especially after a year of the blistering comps, the 19.8% a year ago during this time. During those times it’s very easy to keep throughput top-of-mind and have our crews be focus intensely on it. We had contests running, we had people excited about breaking throughput records, and just a lot of focus on it. And I think that the focus has waned a little bit.”

Investor interest appears to be waning, too. Chipotle’s share price was down more than 6% in mid-morning trading on Oct. 21 from the previous close of $705.63.

To reignite growth, Chipotle plans to accelerate restaurant development with the opening of 215 to 225 new restaurants this year, up from the previously announced range of 190 to 205, and 220 to 235 new restaurants next year. The company also has announced the return of carnitas in 90% of its restaurants nationwide with plans to replenish the ingredient in all restaurants by the end of November. Additionally, Chipotle recently hired its first-ever chief information officer to help build the company’s technology infrastructure. Previously, Curt Garner held the same position at Starbucks Corp.

Chipotle’s sales were hurt this year by a shortage of carnitas in more than a third of its restaurants.

Executives also hope increasing education efforts around Chipotle’s ingredient standards will bring more consumers to the brand.

“Right now, we’re in this challenge where we’ve got three years of growing our sales by 27%, 28%, and comparing to that is difficult,” Mr. Hartung explained to analysts. “And so what we’re hoping will happen is we’ll be able to ignite another trend, another three-year trend. When that will happen, what the order of magnitude of that happening, is very difficult to predict. But over the last 10, 15 years, Chipotle has seen these kind of waves of comps. And most of it is around creating awareness and appreciation for what we do at Chipotle.”
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