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Chipotlane.jpg Photo courtesy of Chipotle
All but five of Chipotle's new restaurants that opened in Q3 were Chipotlane models.

Chipotle Mexican Grill's Q3 exceeds expectations as consumers return to dine-in

Chipotle's sales lifts are driven in part by menu price increases. Chipotle's menu is now about 13% higher year-over-year and close to 20% versus 2020.

Chipotle reported its Q3 results Tuesday after the markets closed, with comp sales up 7.6%, exceeding analysts’ expectations of 7.3%.

Most of those sales numbers came from another round of menu price increases as the company navigates inflationary pressures. Chipotle’s menu is now about 13% higher year-over-year and close to 20% versus 2020. As such, operating margin is 15.1%, up from 12.3% year-over-year.

“The benefit of menu price increases offset elevated costs across the board, most notably in dairy, packaging and tortillas,” CFO Jack Hartung said during the call.

These pricing increases have deterred lower-income consumers away from the chain, however, with transactions from the group in the negative.

“We continue to see a widening of trends by income level, with the lower income consumer reducing frequency. Fortunately for Chipotle, the majority of customers are from higher-income households, which continue to increase purchase frequency,” Niccol said, adding that the company is leveraging its CRM and Rewards program to target different cohorts and create more access for low-income consumers.

Also, Chipotle’s experienced a 21.1% jump in dine-in sales on the quarter, while digital sales dropped to 37.2%, from 39% in Q2 and 41.9% in Q1. Digital sales surpassed 50% in 2021, when CEO Brian Niccol noted that digital orders tend to be about 10%-to-15% higher as they typically include more group orders.  That said, Chipotle’s delivery sales were down in the third quarter, and now represent about 18% of sales. This contributed to a lift in profits, however, as the company paid less in delivery fees. Net income on the quarter was $257.1 million, up from $204.4 million last year.

From a product standpoint, Niccol said Chipotle’s Garlic Guajillo Steak, launched in September, is “getting excellent customer feedback and is driving a higher check.” The chain is currently testing Chicken Al Pastor in two markets, which Niccol said “adds an exciting level of spice to guests’ to-go orders,” and hints that it could be available for a systemwide rollout in 2023.   

Chipotle opened 43 new locations in Q3, 38 of which are Chipotlanes, which generate up to 20% higher sales than traditional formats. Chipotle also recently shifted its focus to small town markets, a strategy that is “performing very well,” according to Hartung. Restaurants in these markets generate comparable margins and returns, yet cost less to open and operate than urban locations.

“The small town restaurants … We’ve had some barn burners that are breaking records in terms of sales,” Hartung said. “The cost structure is more favorable so our margin, even though it’s smaller volume, is actually higher. The cash-on-cash returns in these small towns are stronger than what you’re seeing in a typical average Chipotle,” Hartung said.

Executives also provided an update on Project Square One, an initiative launched in the second quarter focused on improving operations as the company balances dine-in and off-premises business with a high number of employees who weren’t in the system prior to the pandemic. Niccol said progress has been made, but the company is not yet where it needs to be.

“We still have opportunities to get better on the digital business when it comes to accuracy, specifically,” he said.

This training, combined with ramped up staffing levels, are top priorities for the company to continue its growth each quarter.

“One of the biggest opportunities for us is to make sure our restaurants are staffed and trained. I think there is a lot of transaction opportunity in that, both on the frontline, as well as in the digital business,” Niccol said. “We’ve got to treasure every guest because we’ve got to get it right, because it’s going to be a tougher environment for the consumer going forward. So that’s a big opportunity without a doubt.”

Highlights from Q3 include:

  • Revenue increase of 13.7% year-over-year, to $2.2 billion
  • Comp sales increased 7.6%
  • In-restaurant sales increased 22.1%
  • Digital sales represent 37.2% of sales
  • Operating margin is 15.1%, an increase from 12.3%
  • Net income was $257.1 million, an increase from $204.4 million
  • Opened 43 new restaurants, with 38 locations including a Chipotlane

Contact Alicia at [email protected]

Find her on Twitter: @BGbunster

TAGS: Finance
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