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Chipotle sees slow but definite improvement

Blog: Operator makes first true progress in more than a year, but it will take longer to regain losses

This post is part of the On the Margin blog.

Chipotle Mexican Grill Inc. is definitely seeing sales improvement this year — just not as fast as you think.

The Denver-based burrito chain said last week that same-store sales increased 17.8 percent in the first three months of the year. That will be the best performance by a restaurant chain this quarter, barring an unexpectedly strong number from one of the growth chains. 

It was also Chipotle’s best performance since the third quarter of 2014, when same-store sales increased an astonishing 19.8 percent. 

Indeed, it’s difficult to find any restaurant chain at all experiencing the kind of same-store sales whiplash Chipotle had had in the past couple of years. In 2014, unit volumes were approaching that of its one-time benefactor, McDonald’s Corp., and analysts were actively wondering if the stock would reach $1,500 a share. 

As most readers know by now, a series of foodborne illness outbreaks changed all of that. By the first quarter of 2016, Chipotle's same-store sales were down nearly 30 percent — a 50-point swing.

Now same-store sales are swinging back up. But a deeper look at the numbers shows improvement that’s slower than it appears. 

On a two-year basis, same-store sales are still down 11.9 percent. That shows the chain has a long way to go to recapture customers it lost during that fateful 2016. 

At the same time, however, it was the first time in more than a year that the company showed some real progress on that number. In each quarter of last year, two-year same-store sales fell more than 19 percent.

The first quarter represented a 7.5-percent improvement.

The numbers show the chain is likely on track to recapture lost customers in at least another two years. Historically, chains hit with heavy publicity over illness outbreaks require years to recover lost sales. And Chipotle’s problem has been particularly acute — arguably the most significant reaction to a foodborne illness outbreak at a large chain in industry history.

Two-year same-store sales are important because they measure the progress Chipotle is making in regaining the customers it lost over that year. These are “stacked,” meaning they’re simply added together. That can factor out one-time events and give a better picture of the chain’s sales.

Sales are vital to any chain. But Chipotle’s extraordinary sales before the outbreak enabled it to have unit-level profits well above 25 percent — numbers that helped the company quickly fund new unit expansion and earn a stock price far and above that of the rest of the industry. 

It lost that extraordinary status with a rough 2016. To get that back, it needs to generate more sales.

So far, Chipotle is making progress on that front. It’s just going to take time to get back to its old model. 

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

TAGS: Fast Casual
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