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    Chipotle Mexican Grill Inc (CMG)

    CEO Change

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    Business Description

    Chipotle Mexican Grill, Inc. operates a chain of restaurants that primarily serve a menu of burritos, burrito bowls, quesadillas, tacos, and salads, all made using fresh, high-quality ingredients without artificial colors, flavors, or preservatives . As of December 31, 2023, Chipotle owned and operated 3,371 restaurants in the United States and 66 international locations . The company's revenue is derived from sales at these restaurants, with digital sales accounting for a significant portion; in 2023, 37.4% of food and beverage revenue came from digital orders, including third-party delivery and customer pickup . Chipotle's total revenue for 2023 was $9.9 billion, a 14.3% increase from the previous year, with comparable restaurant sales increasing by 7.9% . The company also emphasizes its commitment to sustainability and ethical sourcing, aligning with its mission to "Cultivate a Better World" .

    1. Restaurant Sales - Operates a chain of restaurants offering a menu of burritos, burrito bowls, quesadillas, tacos, and salads.
    2. Digital Sales - Provides digital ordering options, including third-party delivery and customer pickup, contributing significantly to overall sales.

    Q3 2024 Summary

    Initial Price$62.69July 1, 2024
    Final Price$57.17October 1, 2024
    Price Change$-5.52
    % Change-8.81%

    What went well

    • Strong international expansion potential, with the ability to open hundreds of restaurants in current markets and potentially thousands in Western Europe over time. Chipotle has seen 25% to 35% growth in Canada, and is replicating this success in Europe under new leadership.
    • Leadership continuity with focus on aggressive expansion, aiming for 7,000 restaurants in North America and a push to become a more iconic global brand.
    • Investment in AI-enabled personalized marketing, leveraging technology to enhance customer experience and drive incremental value through tailored user engagement.

    What went wrong

    • The unexpected departure of Chipotle's CEO was not anticipated, and while management emphasizes a seamless transition, such sudden changes in leadership can lead to uncertainty in strategic execution and may impact the company's performance.
    • Rising costs due to inflation, particularly in labor and food expenses, are pressuring Chipotle's margins. Management stated that they may not fully offset these increased costs until the second half of 2025, potentially affecting profitability in the near term.
    • New unit performance appears to be lower than in past quarters, as noted by an analyst, which could indicate slowing growth or operational challenges in new restaurants. While management expressed continued excitement about new units, there was no specific explanation for the perceived decline.

    Q&A Summary

    1. Margin Outlook
      Q: What's the path to high 20s restaurant margins?
      A: Management is confident in returning to high 20s margins through initiatives like supply chain efficiencies and new equipment technologies. They believe the algorithm still holds at $4 million average unit volumes and 30% margins. Despite an 80 basis point decline in Q3 margins year-over-year due to unique items, they expect underlying margin improvement.

    2. Pricing Strategy
      Q: Are you planning price increases given inflation pressures?
      A: Currently, there are no immediate plans for a price increase, but they continue to monitor modest inflation in cost of sales and labor. They've already taken price in April to offset a 20% wage increase in California, and underlying labor inflation remains in the low single-digit range.

    3. Throughput Improvements
      Q: How are throughput initiatives impacting operations?
      A: The company saw progress with a 1.2 entree increase in peak 15-minute intervals. They believe technologies and equipment rollouts will further enhance throughput, allowing teams to be more efficient and deployed effectively during peak times.

    4. New Unit Growth
      Q: What's the outlook on new restaurant openings and growth?
      A: Chipotle plans to open 315 to 345 new restaurants in 2025, moving closer to a 10% net restaurant growth rate. They have a robust pipeline and confidence in their development and operations teams to deliver these results.

    5. COGS Margin Deleverage
      Q: Can you explain the deleverage in the COGS margin line?
      A: The 90 basis point deleverage in COGS was due to a 60 basis point impact from portion investments and a 50 basis point impact from avocado comparisons. Additionally, brisket, a premium item, increased cost of sales by 40 to 50 basis points, but it also drove higher check and transactions.

    6. International Expansion
      Q: What's the plan for international growth?
      A: The company is pleased with its partnership with Alshaya in the Middle East, with plans for aggressive growth over the next few years. They are exploring other partnerships for expansion into markets like Latin America and Asia-Pacific.

    7. Technology and AI Marketing
      Q: How will AI-enabled marketing impact comps?
      A: Management is exploring AI models to drive efficiency in loyalty programs, offering truly bespoke experiences to customers based on individual usage and history. This personalization could drive incremental value and improve customer engagement.

    8. Equipment and Automation
      Q: How will new equipment deployments affect margins?
      A: New technologies like dual-sided planchas and produce slicers will drive efficiency and unlock capacity, improving labor models. These initiatives aim to enhance the team member experience and contribute to margin improvement.

    9. Consumer Behavior
      Q: What trends are seen across different consumer cohorts?
      A: Strength is observed across all income cohorts, including low-income consumers. The company believes it is delivering extraordinary value, with a chicken burrito averaging under $10, a 15% to 30% discount compared to peers.

    10. Investment in Brassica
      Q: Does the investment in Brassica signal a move to a platform approach?
      A: The minority investment in Brassica through the Chipotle Next Fund is a passive one. While Chipotle may co-invest with concepts that align with its food ethos, it remains focused on its core business and doesn't see this as a distraction.

    11. Hyphen Automation
      Q: How is the Hyphen automation system performing?
      A: Hyphen is helping unlock demand in the digital channel by increasing output and efficiency. It allows employees to focus on tasks that enhance the guest experience, potentially lifting overall demand and improving accuracy.

    12. Portion Size Investments
      Q: Are portion size investments yielding returns?
      A: While hard to quantify, management notes positive consumer feedback and improvements in value perception metrics. Positive scores on portioning are up 500 points over the spring, indicating better customer satisfaction.

    Guidance Changes

    Quarterly guidance for Q4 2024:

    • Transaction Comps: modest acceleration from Q3 into Q4 (no prior guidance)
    • Cost of Sales: just above 31% (no prior guidance)
    • Labor Costs: low 25% range (no prior guidance)
    • Other Operating Costs: low 14% range (no prior guidance)
    • Marketing Costs: low 3% range of sales (no prior guidance)
    • G&A Expenses: around $163 million (no prior guidance)
    • Depreciation: slight increase (no prior guidance)

    Annual guidance for FY 2024:

    • Comparable Sales: mid- to high single-digit range (no change from prior guidance of mid- to high single digits )
    • Effective Tax Rate: 24% to 26% (lowered from 25% to 27% )

    Annual guidance for 2025:

    • Restaurant Openings: 315 to 345 new restaurants (no prior guidance)
    • Inflation: low single-digit inflation for food and wages (no prior guidance)

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Brian NiccolChairman and Chief Executive OfficerMarch 2018Brian Niccol has served as CEO and a director since March 2018 and became Chairman in March 2020. Previously, he was CEO of Taco Bell and held various executive roles at Pizza Hut and Procter & Gamble .
    Scott BoatwrightChief Executive Officer and Member of the BoardNovember 11, 2024Scott Boatwright was appointed CEO and a board member on November 11, 2024. He joined Chipotle in May 2017 as Chief Restaurant Officer and later served as COO .
    Chris BrandtChief Brand OfficerApril 2018Chris Brandt joined Chipotle as Chief Brand Officer in April 2018. He previously held executive roles at Bloomin’ Brands and Taco Bell .
    Curt GarnerChief Customer and Technology OfficerNovember 2015Curt Garner joined Chipotle as Chief Information Officer in November 2015 and has been instrumental in developing the company's digital platform. He previously worked at Starbucks for 17 years .
    John R. (Jack) HartungPresident of Strategy, Finance & Supply Chain2002Jack Hartung has been with Chipotle since 2002, initially as CFO. He recently transitioned to President of Strategy, Finance & Supply Chain. He previously worked at McDonald's for 18 years .
    Ilene EskenaziChief Human Resources OfficerNovember 2023Ilene Eskenazi joined Chipotle in November 2023 as Chief Human Resources Officer. She previously held senior HR and legal roles at Petco, Boardriders, and other companies .
    Laurie SchalowChief Corporate Affairs and Food Safety OfficerAugust 2017Laurie Schalow joined Chipotle in August 2017. She was previously VP of Public Affairs at Yum! Brands, overseeing CSR, PR, and crisis management .
    Roger TheodoredisChief Legal Officer and General CounselOctober 2018Roger Theodoredis has been Chief Legal Officer and General Counsel since October 2018. He previously held legal roles at Danone North America and The WhiteWave Foods Company .
    Adam RymerChief Financial OfficerOctober 1, 2024Adam Rymer became CFO on October 1, 2024. He has been with Chipotle for 15 years, previously serving as VP of Finance .
    Jamie McConnellChief Accounting and Administrative OfficerOctober 1, 2024Jamie McConnell has been with Chipotle since 2018 and became Chief Accounting and Administrative Officer on October 1, 2024. She was previously VP, Controller .

    Questions to Ask Management

    1. Despite efforts to improve throughput, you've mentioned that only 60% of restaurants have the expo position properly deployed during peak times due to challenges like crew members handling prep work instead; what specific strategies are you implementing to ensure consistent execution of the four pillars of throughput across all locations, and how will you address the issue of prep tasks interfering with peak-time operations?

    2. With investments in technology like the dual-sided plancha and the produce slicer aimed at improving efficiency and employee experience, how do you anticipate these innovations will impact restaurant-level margins in the near term, and can you provide a timeline for when you expect to see a meaningful return on these investments?

    3. Given your success in Canada and the appointment of Anat Davidzon to lead Western Europe, what are the key obstacles preventing you from accelerating unit growth in Europe now, and how soon do you expect to begin significant expansion in that market to capitalize on the potential of opening hundreds or even thousands of restaurants?

    4. While you have expressed confidence in new restaurant performance, noting year two ROI is holding steady, recent data suggests new unit productivity is in the low 80% range; what factors are contributing to this level of productivity, and what actions are you taking to enhance new unit performance and drive higher returns on your restaurant expansions?

    5. You indicated that after the FAST Act price increase, there was a noticeable weakness in sales in California, mirroring broader industry trends in response to inflation; how are you planning to mitigate the impact of such regulatory-driven cost increases on consumer demand, and what adjustments might you make to your pricing or value proposition to sustain traffic and sales growth in affected regions?

    Share Repurchase Program

    Program DetailsProgram 1Program 2
    Approval DateAugust 21, 2024 September 19, 2024
    End Date/DurationNo expiration date No expiration date
    Total additional amount$400 million $500 million
    Remaining authorization amount$559.6 million $500 million
    DetailsAuthorization ends when maximum shares are repurchased or discontinued Authorization ends when maximum shares are repurchased or discontinued

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2024
    • Guidance:
      1. Restaurant Openings: 315 to 345 new restaurants in 2025, aiming for a net growth rate closer to 10% .
      2. Comparable Sales: Mid- to high single-digit range for the full year .
      3. Transaction Comps: Modest acceleration from Q3 into Q4 .
      4. Cost of Sales: Just above 31% in Q4 .
      5. Labor Costs: Low 25% range in Q4 .
      6. Other Operating Costs: Low 14% range in Q4 .
      7. Marketing Costs: Low 3% range of sales in Q4 .
      8. G&A Expenses: Around $163 million in Q4 .
      9. Depreciation: Slight increase in Q4 .
      10. Effective Tax Rate: 24% to 26% for fiscal 2024 .
      11. Inflation: Low single-digit inflation for food and wages into next year .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      1. Sales and Comps: Mid- to high single digits for the full year; around 6% for Q3 .
      2. Margins: Restaurant-level margin around 25% in Q3 .
      3. Cost of Sales: Just below 31% in Q3 .
      4. Labor Costs: Low 25% range in Q3 .
      5. Marketing Costs: Low 2% range in Q3; high 2% range for the full year .
      6. Other Operating Costs: High 13% range in Q3 .
      7. G&A Expenses: Around $175 million in Q3 .
      8. Depreciation: Slight increase each quarter .
      9. Tax Rate: 25% to 27% for fiscal 2024 .
      10. New Restaurant Openings: 285 to 315 in 2024 .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Comp Sales Growth: Mid- to high single-digit range for the full year .
      2. Second Quarter Comps: Highest of the year, with an Easter shift benefit .
      3. Cost of Sales: Mid-29% range in Q2; mid-single-digit inflation for the year .
      4. Labor Costs: Mid-24% range in Q2; 6% wage inflation due to California's minimum wage increase .
      5. Marketing Costs: Low 2% range in Q2; just below 3% for the full year .
      6. Other Operating Costs: Low 13% range in Q2 .
      7. G&A Expenses: Around $129 million in Q2, increasing each quarter .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Comparable Sales: Mid-single digit range for FY 2024 .
      2. Cost of Sales Inflation: Low to mid-single-digit range for FY 2024 .
      3. Labor Costs: Low 25% range in Q1 2024; wage inflation in low to mid-single-digit range, increasing to mid-single-digit range in April 2024 .
      4. Marketing Costs: Low 3% range in Q1 2024; around 3% for the full year .
      5. G&A Expenses: $127 million in Q1 2024; total G&A around $187 million .
      6. New Restaurant Openings: 285 to 315 in 2024, with over 80% having a Chipotlane .
      7. Effective Tax Rate: 25% to 27% for 2024 .

    Latest news

    Recent developments and announcements about CMG.

    Corporate Leadership

      CEO Change

      ·
      Nov 12, 2024, 12:00 AM

      Scott Boatwright has been appointed as the new CEO of Chipotle Mexican Grill, effective immediately as of November 11, 2024. He previously served as the Interim CEO since August 2024 and has been with Chipotle since 2017, holding roles such as Chief Operating Officer and Chief Restaurant Officer .