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On Monday, the restaurant chain issued a report with its financial results for the third quarter. According to the report, Chipotle’s revenue rises 12.2 percent in Q3 meeting expectations, but its earnings were a general disappointment to investors.
The results show that the popular burrito chain currently experiences a slowdown in growth, although in the past three years its expansion skyrocketed. Because of the disappointing results, its shares sank more than seven percent in the after-hours on Tuesday.
Nevertheless, same-restaurant sales, or comps growth, increased 2.6 percent, while earnings per share jumped 10.6 percent to $4.59. The operating margin for restaurants slightly declined from 2014 and reached 28.3 percent.
All in all, results are not disastrous, and the company’s shares continue to trade at pretty high premiums since investors have great expectations for the company. Last year, Chipotle was a worthy opponent for MacDonalds, especially due to its tactics to promote healthier and community-friendly food.
Analysts said that the company’s troubles are only temporary, and the reasons for them are pretty clear. For instance, one of the company’s moves directly affected sales. Last year, Chipotle hiked prices which led to a nearly 20 percent comps growth.
But that didn’t last until this quarter and the restaurant found it hard to keep up the pace. On the other hand, the company reported that in Q3 traffic rose by nearly 2 percent from Q2.
Another reason for the lackluster earnings results is labor costs. The company heavily invested in its workforce and hiked hourly wages by 5 percent on average. Plus, it expanded benefits and rolled out programs to support employees’ further training. This led to a fall in operating margins by 50 bps.
But earning per share kept rising because labor costs increased.
Furthermore, there are reasons beyond the company’s management that led to current financial results. For instance, producers decided to hike pork and beef prices amid problems with supply chain. This impacted comps and margins.
While beef price continued to rise, the company maintained prices down. Only recently, it announced that it would raise prices of its beef-based products. In the third quarter, the hugely popular alternative to beef products, the carnitas, were sold only in 60 percent of U.S. locations.
As a result, sales dropped, but managers didn’t hike prices in locations that sold beef items but didn’t have carnitas on sale. Yet, food costs for Chipotle accounted for 33 percent of revenue because other food items became less pricier including diary products and avocado.
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