On June 18, the restaurant chain Chipotle Mexican Grill (NYSE: CMG) completed its highly publicized 50-for-1 stock split. Shareholders saw their $3,000 shares converted into 50 shares worth about $60 each.
On July 24, Chipotle reported its second-quarter financial results, and the stock initially soared after hours trading. But once management spoke with analysts about the topic, earnings conference callThe stock has stabilized. Although the second quarter numbers were excellent, concerns were expressed in the comments that followed.
Indeed, there are several things investors should be aware of during the second-quarter earnings call. Here are two key takeaways.
Traffic trends are slowing
Chipotle’s Key Numbers Worthy of Acclaim: Q2 comparable store sales Restaurant sales increased 11.1% from a year earlier. That’s on top of a 7.4% increase in the same quarter last year. Same-store sales were driven in part by higher menu prices, but the company still saw more than 8% growth in transactions in the second quarter, showing that traffic at its restaurants continues to increase.
Those impressive results deserve credit, but there’s more to it. Management said comparable sales were strongest in April. In June, growth had fallen to 6%, and July saw a similar pace.
What could be causing this slowdown? It’s worth noting that a social media trend emerged in May when many customers filmed their experiences at Chipotle, alleging that the company was skimping on portion sizes. Then, in June, Wells Fargo Analyst Zachary Fadem ordered 75 burrito bowls, weighed them, and noted a wide disparity in portion sizes, lending credence to customer complaints. All of this happened while comps were down, which may be, as the great Yogi Berra once said, “too coincidental to be a coincidence.”
Chipotle CEO Brian Niccol addressed this topic early on in the company’s most recent earnings call. He said that generous portions are part of the company’s core brand identity and acknowledged that management has found some outliers in its system that need to be addressed. Consumers and investors should expect the portion controversy to die down in the future.
Profit margins could contract
Just like Chipotle’s steady traffic growth, its profit margins should also be commended: Second-quarter revenue was extraordinary. Increased restaurant traffic pushed average unit volume over the previous 12 months to more than $3.1 million, and that higher volume drove higher profits.
On the restaurant side, Chipotle reported an operating margin of 28.9% in the second quarter, up from 27.5% in the same period last year. For a restaurant company, that’s top-tier profitability, but it could be reaching its peak.
Rising prices have been a recurring theme for the past few years. Since the start of the pandemic, inflation has driven up costs for businesses and consumers. But since 2019, Chipotle’s profit margin has nearly doubled, suggesting that prices have increased far more than was necessary to offset inflation.
Chipotle price increases are…
