Key Chipotle Metrics
Chipotle was not immune to the decelerating visitation trends that impacted much of the restaurant category during 2Q22, with comparable-store sales decelerating in mid-May (a consistent theme). Nevertheless, we believe the most important takeaway from a CRE perspective were comments regarding throughput and what improvements on that front might mean for the chain’s future per-unit sales potential.
- Chipotle visitations decelerate in May, but remain ahead of the fast casual category. Chipotle noted that its comparable sales were on track to reach the top end of its 2Q22 outlook range (10%-12%) through mid-May before decelerating and coming in at 10.1% for the quarter (indicating mid-to high-single-digit comparable sales growth during the back half of the quarter). For the quarter, transaction growth increased 3.5%-4%, with management attributing the step-down to a combination of macro pressures, its ability to handle the growth with a relatively new workforce (more on that below), and a return to normal summer seasonality for college-based restaurants. The company was also impacted by a decrease in the average group transactions as transactions moved from digital to in-restaurant. Looking ahead to 3Q22, with pricing from last year rolling off, Chipotle noted that July comparable sales are running in the mid-single digit range and that it expects this figure to be in the mid to high-single digit range for the full quarter (including a planned August price increase of about 4% to help offset incremental inflation pressures in dairy, tortillas, and packaging, as well as pockets of wage pressure throughout the country). Management noted that it expects transaction growth will be flat to slightly positive for the quarter. Placer.ai data suggests that in-store visits are up but that short visits (digital order and pickup and delivery orders) have decelerated due difficult year-over-year (YoY) comparisons, accounting for the delta to Chipotle’s reported numbers. Positively, Chipotle’s in-store visit growth trends remain ahead of the broader fast casual restaurant category (below).
- Chipotle insulated from low-income consumer pullback. With respect to consumer behavior, Chipotle CEO Brian Niccol offered some perspective: "[W]hat we saw was probably not all that different from what people have been saying. The low-income consumer definitely has pulled back their purchase frequency. Fortunately for Chipotle, that is not the majority of our customers. The majority of our customers are the higher household income consumer. We've actually seen their frequency increase."
- Chipotle's throughput not back to historical levels but improving. Throughput was a major discussion topic throughout Chipotle's 2Q22 update, as it has been across much of the restaurant category that has struggled with labor scarcity for several years. According to management, the company has a lot of new employees that "are still getting trained up on frankly the basics of great throughput." Management cited its goal to get its front of the restaurant make line back to peak-hour historical transactions in the "high 20s to low 30s" per 15 minutes (indicating roughly 120 transactions per hour). We thought we'd examine the potential throughput opportunity by looking at the chain's peak hour visitation trends over the past several quarters. We reviewed visitations from 12 PM-2 PM (historically the company's peak lunchtime hours) for the past several quarters and found that visits per hour were currently running in the mid 60s (which is clearly below historical peaks) but remains on an upward trajectory. However, we believe there are a few caveats to explain some of the difference. One, lunchtime visits are down across the restaurant industry due to increased work from home and hybrid work models, which is impacting demand. Two, this data largely represents in-store visits and not short visits (mobile order takeout and delivery orders), which now represent 40% of total sales volume. Three, there is a wide range of variability in peak hour visitation trends across the chain, but the company's top locations (many in markets less impacted by work from home shifts) have been posting close to 160 visits per hour, suggesting there is considerable upside to current metrics.
- Throughput improvements offers upside to future sales growth. As Chipotle improves on its throughput metrics, there is considerable upside to average unit sales. At present, Chipotle's locations are posting trailing-twelve-month average unit volumes of about $2.8 million (with 39% coming from digital orders, as discussed above). Still, as the company improves efficiency on both its front and second make lines, it sees that opportunity to improve this number above $3 million. According to Niccol, there may be even greater upside, as he doesn't "see any capacity constraint that would prevent us from saying $4 million is next up."
