Chipotle Rides Two Restaurant Trends to Post Strong Sales

But Fast-Casual Chain Missed Wall Street's Expectations on Way to Second-Quarter Sales Boost of 10%

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Chipotle must be doing something right, though it came up short based on Wall Street 's expectations for the hot brand.

The company's second-quarter same-store sales were up 10%, and net income was up 9% to $50.7 million, vs. the year-ago period. Total revenue for the quarter was $571.6 million, up 22 .4%.

The company's results come at a time when the restaurant industry is still struggling to return to pre-recession levels.
The company's results come at a time when the restaurant industry is still struggling to return to pre-recession levels.

But while the chain reported strong results, the company's profits missed Wall Street 's expectations. Earnings per share for the quarter was $1.59, missing analyst's expectations. The average of 21 analysts' estimates compiled by Bloomberg was for estimated profit of $1.67 per share.

Chairman and co-CEO Steve Ellis during an earnings call today said the quarter was "also challenging in many ways, with margins under pressure from food inflation picking up and the U.S. Attorney's office entering the immigration investigation in April," referring to the hundreds of undocumented workers that were fired as a result of U.S. Immigration and Customs Enforcement audits of the chain's hiring practices in Minnesota, Virginia and Washington. Still, the company is continuing a long streak of growth. Its same-store sales in 2010 were up 12.6%, and net income was up a whopping 47% from the year before.

The company's results come at a time when the restaurant industry is still struggling to return to pre-recession levels. Chipotle, though, finds itself in the basking in the glow of two industry bright spots: fast-casual dining and the Mexican category.

The top 100 fast-casual chains' systemwide sales in the U.S. were up 6% in 2010, according to Technomic. Chipotle is the No. 2 fast-casual chain in the U.S. by sales, trailing only Panera. The number of fast-casual visits was up 7% compared to fast food's traffic increase of 1%, and the total restaurant industry's flat performance, in the year ended May 31, according to NPD Group.

Sales at Mexican limited-service restaurants, which includes fast-food and fast-casual chains, were up 4.3% in 2010, and were up 2.3% in 2009, according to Technomic. The number of Mexican items served at restaurants was up 2% in the year ended May 31, according to NPD.

"They have a strong position for a number of reasons," said Mary Chapman, director-product innovation at Technomic. "Mexican food is on trend and consumers view fast-casual as a little better than fast food. The price points are higher, but the atmosphere and the opportunity to have your food created in front of you is appealing."

Essentially, fast-casual dining offers consumers an opportunity to trade down to lower-priced yet higher-quality food, and at the same time also allow quick-service customers to trade up from fast food.

Ms. Chapman added that Chipotle is "getting a lot of props for their food-with-integrity positioning. They're kind of leading the industry in that charge because they're showing a chain can take those positions and be successful."

The chain also benefits from consumers' perception that the chain's food is fresher. Mr. Ellis said that this year the company is targeting at least 10 million pounds of produce from farms that are within 350 miles of our restaurants. "This goal is in stark contrast to most produce served in this country which to plead travels about 1,500 miles," he said.

During the earnings call, Mr. Ellis said the company's unorthodox marketing efforts have paid off well. "The good news is that these efforts are helping to influence customers' appreciation of Chipotle." He added that based on the company's most recent marketing research, Chipotle's marketing "broke through an incredibly competitive category and successfully communicated the story of our better ingredients."

In recent years, Chipotle relied less and less on traditional advertising, as the chain did not find much use for media such as TV. The chain's measured media spending was a mere $7.5 million in 2010, according to Kantar, a fraction of what many other fast-food heavyweights such as McDonald's and Mexican-category leader Taco Bell spend.

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