If consumers are starting to show signs of weakened spending against an uncertain economic backdrop, Chipotle isn’t seeing them. The company’s Q1 results, reported Tuesday, showed a 10.9% increase in comp sales and a 4% increase in traffic, indicating consumers aren’t turned off by prices that remain about 10% higher than they were last year.
In fact, it seems more consumers are adding Chipotle to their value consideration set. Contrary to just two quarters ago, when the chain reported less frequency from its lower-income consumers because of increasing pressures, Chipotle this time around saw those consumers come back “almost at the same rate as our higher income consumers,” CFO Jack Hartung said on the call.
“We see that as a positive macro sign, so we’re cautiously optimistic about what’s going to happen in the second half of the year,” he said. “It looks like unemployment is holding up really well. It looks like consumer spending is strong right now.”
CEO Brian Niccol attributed the traffic bump to several factors, including the company’s operational improvements, called Project Square One, put into place last summer to bring its workforce up to speed after two years of abnormally high, pandemic-induced turnover. He said hourly and salary metrics for turnover during the quarter were “some of the best I’ve seen in five years.”
“As our teams are getting more experience, we are continuing to see improvements in each of the Project Square One focus areas, including throughput on the frontline, on-time and accuracy on the digital makeline, being prepped and ready with our delicious food, and the overall customer experience,” Niccol said. “When our operations are running better, it helps all other drivers of sales to perform better, such as menu innovation.”
On that menu innovation piece, Chipotle found success during the quarter with its fajita quesadilla launch in early March, inspired by TikTok creators Keith Lee and Alexis Frost. Niccol said the rollout nearly doubled the company’s quesadilla business and generated two of its top digital sales days ever.
“The results have been outstanding,” he said.
Chipotle also found traction with its Chicken Al Pastor limited-time offer, also introduced in March.
“Early indications show that it is outperforming Pollo Asado, which was our most successful protein LTO ever,” Niccol said.
During Q1, Chipotle gained 1.4 million rewards members, with 33 million guests now enrolled. The chain experienced an uptick in signups during its Freepotle launch in January, which includes free food drops and other incentives and is positioned as an alternative to subscription programs. Freepotle, Niccol said, was designed to deliver a strong value proposition and attract new members.
“We also saw an increase in member engagement as Freepotle gained traction throughout the quarter,” Niccol said.
Chipotle plans to continue evolving its Rewards program to “dial up the personalization and make it super easy to stay active and engaged,” he added.
“We know the more engaged you are, it plays out in more purchase frequency and higher ticket,” he said.
Chipotle is aiming to get from 33 million members to 40 million members because of these benefits.
Additionally, several factors – including cooled inflation – during the quarter enabled Chipotle to improve its restaurant-level margins, which were 25.6%, or an increase of 490 basis points year-over-year. For added context, restaurant-level margin was 23.9% last quarter, which were below analysts' expectations and impacted share prices following that February call. Executives are bullish its positive trend will continue in the near term.
“We definitely expect our margins to step up from here,” Hartung said. “Q2, from a seasonal sales standpoint, is a stronger quarter for us. We typically see higher margins in the second quarter.”
Finally, Chipotle continues to build restaurants en route to its 7,000-unit goal and is on pace to add 8-to-10% per year “for the foreseeable future,” with at least 80% including a Chipotlane. Notably, Chipotle is garnering a strong response in smaller markets, and Niccol noted a recent opening in a “small town in California” generated the second-highest opening sales day ever for the company.
“Within the last year, we had our top five openings in the company’s history, of which four were in small towns,” he said. “All the restaurants we’re opening, they’re opening with strength. It’s great to see the small towns do really well and it’s great to see the restaurants do really well in urban and more penetrated markets. So, lots of opportunity in front of us on the new restaurant opening frontier.”
Contact Alicia Kelso at [email protected]