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Chipotle Mexican Grill: Transaction Declines Grab the Headlines, but Divergence Between In-Store and Digital Orders is the Real Story

RJ Hottovy
Oct 28, 2022
Chipotle Mexican Grill: Transaction Declines Grab the Headlines, but Divergence Between In-Store and Digital Orders is the Real Story

Key Chipotle Metrics

As one of the first restaurant chains to report its 3Q22 results, Chipotle’s update sparked a debate about whether or not the chain and its competitors have raised pricing too aggressively to offset inflationary headwinds the past several months. While the market seemed surprised by the retailer’s disclosure that transactions fell by 1% during the quarter, we’ve pointed out that that YoY visitation trends across the restaurant space had been on the decline for much of the summer as the food away from home consumer price index continues to push almost 9% growth year-over-year.

Interestingly, the bifurcation trend that we’ve called out several times in the past several weeks is playing out across the restaurant sector. As inflation headwinds increasingly moved top of mind for most consumers with gas price spikes in March and April, QSR and fast casual chains outperformed the broader category from May-August. However, more recently we saw that outperformance gap almost completely evaporate in September as consumers started to balk at higher prices whereas higher-income consumers were comforted by improving equity and stable housing market and started to return to full-service restaurants.

With industry trends as context, we can better assess Chipotle's visitation trends in the quarter and their implications for the category:

  • Comps impacted by smaller order sizes and less visits from lower-income consumers. Admittedly, there was a lot to unpack from Chipotle’s reported third-quarter comparable store sales growth of 7.6%. As noted above, management discussed that transactions decreased by roughly 1% for the quarter while pricing was up 13% (suggesting that there was roughly a 4% due to fewer items per order hit and other mix shift factors). Management explained with some of the decrease being explained by a return to more “normalized” consumer behavior (resulting in smaller group sizes, and by extension, fewer orders per transaction) but also reduced frequency from lower income consumers. However, management continues to tout that the majority of its customers come from higher income households ( data indicates that the collective trade area for Chipotle’s locations during 3Q22 had an average household income of $61K versus the national average of $58K, and that nearly 54% of its visits during the quarter were derived from census blocks exceeding the national household income average).

  • The shift to physical from digital is also impacting Chipotle’s sales trends. In keeping with our previous discussions about the widespread shift to physical assets away from digital assets, management noted that in-store sales grew by 22% over last year, while digital sales shrank from almost 43% of sales in 3Q21 to 30% of sales in 3Q22. If we remove the aforementioned pricing and mix shift factors from the 22% growth, it implies high-single-digit in-store visitation growth during the quarter, which is what our data also confirms (with August coming in as the strongest month during 3Q22). This also indicates that the 1% decrease in overall transactions was entirely due to declining digital orders, which will likely be a consistent theme as other restaurant operators provide updates in the coming weeks.

  • 4Q22 outlook “choppy”. Management characterized current comparable sales trends as “choppy” as the company laps its brisket limited-time offer from last year (our data indicates a low-to-mid single digit decrease in in-store visits over the past three weeks). Balancing declines in in-store and digital orders with pricing increases (which will move to 15% during the with the latest round of menu price increases before dropping down to 11% in 1Q23), management expects its October comps will likely end in the mid-single digit range and full 4Q22 comps in the mid- to high-single digit range for the full fourth quarter as its Garlic Guajillo Steak limited-time offer will be in restaurants through the end of the quarter.
  • New store economics encouraging. Despite concerns about visitation trends, our data confirms that Chipotle’s new units have opened strong. Management noted that its new stores are achieving 80%-85% of what its legacy restaurants do. Our data also suggests that recent Chipotlane format stores are slightly outperforming non-Chipotlane restaurant openings, and that smaller-market openings continue to outperform larger markets, something we have discussed in the past. .

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RJ Hottovy

Head of Analytical Research,

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank. R.J. also brings a wealth of experience with early-stage investments as a committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he advised over 50 food service companies on more than $200 million in early-stage capital raises and M&A transactions.

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