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Earnings Results: Chipotle plans to target small towns for new locations, as they fuel record profit

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Chipotle Mexican Grill Inc. more than doubled its profit to a record high in 2021, and executives said Tuesday that they now expect to increase plans for expansion while targeting smaller towns that are producing better profit margins.

Chipotle executives now expect that the chain will grow to 7,000 North American locations after previously targeting a long-term total of 6,000, while targeting towns of roughly 40,000 people or more. In a quarterly earnings announcement Tuesday afternoon, executives said they had discovered small-town locations were “delivering unit economics at or better than traditional Chipotle locations,” and they were more specific in a later conference call.

“It’s definitely a little bit higher margin because the cost of the lease is a little bit lower, and what we’re seeing, though, is no trade-off in volume. Actually, it’s probably outsized — call it revenue or sales,” Chief Executive Brian Niccol said, while outlining the size of cities Chipotle is considering. “So it’s kind of a really great proposition because, a little bit cheaper to put in some of the fixed cost, and then people view us as an employer that they want to be a part of, so we have a really good success rate in staffing them, and then the towns are really excited to have a Chipotle so we see great sales, opening sales and then sales that stay with us.”

Chief Financial Officer Jack Hartung called small towns “a home run” from a financial standpoint, and said Chipotle would also consider areas with fewer than 40,000 people “that might be on an expressway or something.”

Chipotle CMG, +0.51% reported fourth-quarter net income of $133.5 million, or $4.69 a share, on sales of $1.96 billion, up from $1.61 billion a year ago. After adjusting for stock compensation, restructuring and other costs, the Mexican-food chain reported earnings of $5.58 a share, up from $3.48 a share a year ago.

Analysts on average expected adjusted earnings of $5.25 a share on sales of $1.96 billion, according to FactSet. Shares increased more than 6.5% in after-hours trading Tuesday following the release of the results, after closing with a 0.6% gain at $1,462.15.

For the full year, Chipotle more than doubled its earnings while growing sales more than 26%. Chipotle reported net income of $653 million, or $22.90 a share, on sales of $7.55 billion, with adjusted earnings of $25.42 a share. In 2020, the chain reported adjusted earnings of $10.73 a share on sales of $5.99 billion.

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Executives admitted they raised prices multiple times during the year, specifically mentioning an increase that was paired with raises for retail employees in May and a more recent 4% increase in December, to combat rising food prices and other increasing costs. An analyst on the call asked if executives were worried about raising prices too much, while suggesting the overall increase was roughly 10%.

“We really do analyze what happens to transactions, and the good news is, we have so much data now with our loyalty database that we’re able to understand: ‘Are there any behavioral impacts from what we’re seeing?’ And we see very little resistance there,” Niccol said.

“There’s a lot of head room [to raise prices] from what we can tell, and I really hope we never have to use all of it, but we’ll be judicious and when we need to, we will,” he concluded.

Analysts have largely agreed with that sentiment, pointing out that Chipotle is relatively cheaper than fast-casual rivals.

“Chipotle’s core burrito/bowl prices range from $8.05 (chicken) to $9.40 (steak) in most markets, a noticeable discount to core sandwich/salad offerings at Panera (most $10-12), lower than Qdoba ($8.98-10.05), and also lower than the cost of a single cheeseburger + fries at Shake Shack SHAK, +4.74% ($9.24),” Raymond James analysts wrote about a recent pricing study. “The cost for a bundled meal (core item + soft drink) is also 6%-14% higher at Qdoba/Shake Shack/Panera, and ~33% higher at Five Guys.”

“Even as Chipotle pushes through unprecedented price increases, digital users, which according to our data account for ~half of the company’s sales … have shown remarkable resilience,” Keybanc Capital Markets analysts wrote in a preview of the report.

Chipotle stock has hit record highs during the pandemic, as the chain has consistently shown strong growth and record results while quickly pivoting to online ordering. Executives said Tuesday that 41.6% of orders were made digitally, while comparable-restaurant sales rose 15.2% year-over-year.

“Incredibly, our full-year digital sales of $3.4 billion is nearly 3.5 times what we did pre-COVID in 2019,” Niccol said.

Chipotle shares have suffered in the early days of 2022, along with other stocks that shot higher during the pandemic. The stock has declined more than 16% so far in 2022 and nearly 19% in the past three months, while the S&P 500 index SPX, +0.84% has lost 5.9% and 4.6% in those periods.

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