Chipotle Mexican Grill (CMG): A few points to keep in mind if you have an eye on this restaurant chain

Shares of Chipotle Mexican Grill Inc. (NYSE: CMG) were down 3% on Tuesday. The stock has dropped 13% year-to-date but there is still a positive sentiment in general about its trajectory. The burrito chain saw sales and profits grow during its most recent quarter even as the economic environment remained challenging. Here are a few points to keep in mind if you are considering this stock:

Sales and profitability  

Chipotle delivered sales and profit growth in a difficult operating environment. Total revenue for the third quarter of 2022 increased nearly 14% to $2.2 billion compared to the same period a year ago, driven by comparable restaurant sales growth and new restaurant openings. Comparable restaurant sales increased 7.6% in Q3. In-restaurant sales increased 22.1% during the quarter while digital sales made up 37.2% of total food and beverage revenue.

Adjusted EPS rose 35.5% year-over-year to $9.51 in Q3. Restaurant-level margin increased around 180 basis points to 25.3% versus the prior-year period. Operating margin increased to 15.1% from 12.3% last year. Chipotle expects comparable restaurant sales to grow in the mid to high single digits in the fourth quarter of 2022.

Resilience during inflation

Chipotle has managed to stay relatively resilient amid inflationary pressures. During the third quarter, Chipotle did see a reduction in purchase frequency among its lower income customers but the frequency increased among its higher income customers, who make up the majority of its customer base. The company also faced minimal resistance to its price increases during the quarter.

Cost of sales during the third quarter were down 50 basis points to 29.8% as the benefit of menu price increases offset higher costs across the board. In the fourth quarter, the company expects cost of sales to remain the same as the benefit of menu price increases will be offset by higher costs for beef, chicken, dairy and tortilla.

Expansion opportunity

Chipotle has meaningful expansion opportunities ahead. Along with expanding in its core markets, the company has potential to expand into smaller towns in the US as well as into Canada. Within the US, small-town restaurants have comparable margins and return to the company average and the company sees meaningful growth opportunity in this space. Chipotle plans to enter Alberta, Canada in 2023 with its first location in Calgary. The company sees opportunity here as Edmonton and Calgary have large populations.

Chipotle opened 43 new restaurants in the third quarter and it remains on track to open between 235 and 250 new restaurants in 2022. Over the long term, the company aims to reach 7,000 restaurants.

Click here to read the full transcript of Chipotle Mexican Grill’s Q3 2022 earnings conference call