Restaurants

Chipotle shares rally on earnings beat as CEO Niccol's changes take hold

Key Points
  • Shares surged by almost 7 percent after the company beat Wall Street estimates, as some of the changes outlined by new CEO Brian Niccol last month appear to be taking hold.
  • Chipotle reported better-than-expected earnings after the market closed on Thursday.
  • It's been about a month since the company announced plans to spend up to $135 million to win back customers and reposition Chipotle as a lifestyle brand.
Chipotle shares up after earnings beat
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Chipotle shares up after earnings beat

Diners at Chipotle Mexican Grill spent more and avocados cost less during the second quarter, driving better-than-expected earnings, which sent shares soaring when the market opened Friday.

Shares surged by 6.6 percent in morning trading after the company beat Wall Street estimates, as some of the changes outlined by new CEO Brian Niccol last month appear to be taking hold. The company reported earnings after the market closed Thursday.

The burrito chain attributed much of its growth to the 34 new restaurants it opened during the quarter, bringing its total number of locations to 2,467. The company also said people spent more per check, with many customers opting to add queso to their meals. That helped bolster same-store sales, even though foot traffic decreased 1.8 percent.

Food costs as a percentage of revenue also dropped to 32.6 percent, down by about 1.5 percent from last year as Chipotle raised menu prices and got "some relief on avocado prices," the company said.

The company's revenue jumped 8.3 percent to $1.27 billion from $1.17 billion during the second quarter of last year, slightly better than the $1.26 billion analysts surveyed by Thomson Reuters expected.

Niccol announced an aggressive new strategy last month to woo customers back to the troubled chain.The company is still recovering from a series of outbreaks of E. coli, salmonella and norovirus beginning in 2015 that were tied to its restaurants. The food safety problems tanked sales and halved its market value.

"It takes time to build a culture of accountability," Niccol said on an earnings conference call after earnings were released Thursday. "We know that when the food is delicious, the feel of the restaurant is great, and we remove the friction from the flow of the order processes, no matter the channel, we delight customers."

The company said its digital sales grew 33 percent during the quarter and now account for 10.3 percent of total sales. In addition, its delivery sales quadrupled. Delivery is currently available at 1,700 stores, but the company expects 2,000 locations will be equipped for delivery by the end of the year.

Digital and delivery orders are an increasingly important part of the industry as they tend to generate larger checks. On average, online orders are $16 to $17 at Chipotle while in-restaurant checks average around $12, the company said.

Net income fell by about 30 percent to $46.9 million, from $66.7 million the year before. It included $33.4 million in charges related to restaurant closures. Without the charges, the company reported adjusted earnings of $2.87 a share, compared with $2.80 a share forecast by analysts.

Same-store sales, which grew at 3.3 percent, also beat estimates of 2.7 percent, according to StreetAccount. Chipotle raised its guidance sales for comparable restaurants from "low single digit expectations" to "low to mid-single digits."

The company's spending about $135 million on Niccol's campaign to reposition Chipotle as a lifestyle brand. The expenses will cover new ads, digital investments to speed mobile and online orders as well as the costs of closing up to 65 underperforming locations.

The hope is that Niccol, who joined the company on March 5, can revitalize the brand. He has a reputation for marketing and technology innovation, two key areas that have not been a top priority for Chipotle. At Taco Bell, he introduced mobile order and pay, and pushed for more ingenuity in the kitchen.

Shares of the company are up more than 50 percent since January, a sign that investors are banking on Niccol's changes.