Chipotle earnings strong despite store traffic decline

by Monica Watrous
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Photograph of Chipotle restaurant exterior
Store traffic declined during the second quarter.

DENVER — Is a simpler tortilla the answer to Chipotle Mexican Grill’s sagging store traffic? The Denver-based burrito chain is reworking its wrap as part of longer-term mission to simplify the food it serves in its 1,878 restaurants. But despite completing its latest initiative to remove all bioengineered ingredients from its menu in the recent quarter, Chipotle reported fewer transactions during the period.

Still, the burrito chain delivered double-digit earnings and revenue growth during the second quarter ended June 30. Chipotle had net income of $140,204,000, equal to $4.51 per share on the common stock, up 27 percent from $110,270,000, or $3.55 per share, in the prior-year period. Net revenues advanced 14 percent to $1,197,783,000 from $1,050,073,000 the year before. Comparable restaurant sales rose 4.3 percent for the quarter, driven in part by higher menu prices.

As part of its mission to serve simpler ingredients, Chipotle in a partnership with Washington State Univ.’s bread lab has engineered a tortilla with five ingredients: flour, water, starter, vegetable oil and salt.

“While this might sound like a relatively simple undertaking, it’s actually quite a challenge because one has to account for a number of variables,” said Steven Ells, founder, chairman and co-CEO of Chipotle, during a July 21 earnings call with financial analysts. “Moisture in the flour, temperature and humidity in the bakery, strength of the starter, etc. And many of the chemical additives in commercial tortillas are designed to mitigate these variabilities.”

The company plans to scale the project for continued testing later this fall, he added.

But while the preservatives and dough conditioners typically found in commercially made tortillas have been declared safe to eat, Ells said Chipotle will no longer “rely on any of the artificial ingredients that are so prevalent in processed foods.”

Chipotle isn’t the only restaurant committing to eliminate artificial ingredients. In recent months, such fast-food brands as Pizza Hut, Taco Bell, Papa John’s and McDonald’s have announced similar plans.

“With competitors making vague pledges, we are strengthening our marketing message to continue to show the contrast between what Chipotle has always done and the changes others are pledging,” Ells said.

For the first six months of the year, Chipotle’s net income rose 36 percent to $262,845,000, or $8.47 per share, which compared with $193,339,000, or $6.23 per share, for the first half of the prior year. Revenue for the period increased 17 percent to $2,286,826,000 from $1,954,236,000. Comparable restaurant sales year-to-date increased 7 percent.

Looking ahead, management expects to deliver low-to-mid single digit increases in comparable restaurant sales for the fiscal year, with new restaurant openings at or above the high end of the previously announced range of 190 to 205.

The company is also working its way through a shortage of pork that meet the company’s quality standards. Earlier this year Chipotle suspended a pork supplier who did not meet its animal welfare standards. The company said it has found a new pork supplier and expects to be fully supplied by the end of the year.

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