Financial Performance

Chipotle Soothes Investors With Earnings Beat

Amid renewed food safety concerns, the restaurant chain more than doubled profit in Q2 but "the larger story is the soft [sales] growth."
Matthew HellerJuly 26, 2017

Amid renewed concerns over food safety at its restaurants, Chipotle Mexican Grill reported it more than doubled earnings but its same-store sales growth missed Wall Street expectations.

The restaurant chain was hit last week by reports of a norovirus outbreak at a store in Virginia and of vermin infestation at a Dallas outlet. The earnings report released Tuesday was somewhat better news for investors.

For the second quarter, Chipotle posted net income of $66.7 million and revenue of $1.17 billion, which was up 17.1% on a year ago. Earnings per share came in at $2.32 per share, easily beating analysts’ estimate of $2.18 per share.

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But same-store sales rose 8.1% during the quarter, disappointing Wall Street, which had anticipated growth of 9.7%.

Chipotle CEO Steve Ells said there were “encouraging signs in our improved financial results during the first half of the year.” But he added that recent events “have shown that we still have a lot of opportunity to improve our operations and deliver the outstanding experience that our customers expect.”

During the earnings conference call, he said the company has to do a “better job” and show that it takes food safety procedures “very, very seriously.”

In trading Tuesday, Chipotle shares rose 2.6% to $8.86, recovering partially from the 12% drop they suffered on news of the norovirus outbreak. “Chipotle’s earnings beat today shows that the management team is tackling the tough cost elements of labor and food cost,” Trevor Boomstra, principal in the consumer industries and retail practice at A.T. Kearney, told CNBC.

Chipotle’s restaurant level operating margin — total revenue less restaurant operating costs, expressed as a percentage of revenue — improved to 18.3% from 11.6% in the second quarter.

“But the larger story is the soft growth,” Boomstra cautioned. “They missed top-line sales and comps of 8 percent from a soft 2016 base. They continue to recover but at a relatively slow pace.”

Forbes noted that because the quarter ended before the latest health scares occurred, “the full effects of the newest negative headlines remain to be seen.”