Chipotle Earnings Show the Polar Vortex Didn’t Freeze Out Sales

Source: Getty Images

Chipotle (NYSE:CMG) shares were surging Thursday during morning trading after the fast food chain posted its first-quarter earnings and proved to investors that consumers still visited its restaurants this winter, despite the frigid temperatures and intense competition from rivals. Shares jumped about 5 percent in premarket trading and sat at $552.40 as of 9:20 a.m. Eastern on Thursday.

The good news for Chipotle is that its sales rose 24 percent to $904.2 million in the first quarter of 2014, reflecting the restaurant’s largest quarterly gain in two years. Chipotle’s figure also beat analyst expectations, as they predicted revenue of $873.5 million. The number for sales at stores open at least 13 months was also impressive, jumping 13.4 percent, while analysts estimated an 8.8 percent increase. Chipotle’s profit figure wasn’t as favorable, on account of higher food and operational costs limiting its profit gains. First-quarter net income increased 8.5 percent to $83.1 million, or $2.64 per share, from $76.6 million, or $2.45 per share, a year ago. Analysts estimated $2.87 per share.

Source: Chipotle

But despite the disappointing income figures, Chipotle still impressed investors and analysts with its 2014 projections. The company raised its forecast for 2014 comparable-store sales growth to the high single-digit range; it had anticipated a low- to mid-single digit range improvement. Steve Ells, chairman and co-CEO of Chipotle, demonstrated satisfaction with the Mexican chain’s promising progress in the first quarter of the year, and he said in a statement following the earnings release, “We are delighted that more and more people are choosing to visit our restaurants every day allowing us to deliver double digit comps during the quarter.”

Chipotle earned a significant degree of media attention in the first three months of 2014 as it expanded its tofu offering, shared concerns over rising operational costs, and fielded questions about a possible guacamole drought. While competitors like McDonald’s (NYSE:MCD) and Burger King (NYSE:BKW) didn’t fare so well at the beginning of the year, customers continued to visit Chipotle stores. However, that doesn’t mean Chipotle hasn’t been facing problems of its own.

The Denver-based chain has witnessed inflationary pressures in beef, avocados, and cheese prices, and that was reflected in its cost picture made available Thursday. Food, beverage, and packaging costs rose 30 percent for the first quarter, and food costs accounted for 34.5 percent of total revenue, up from 33 percent in the year-ago quarter. Those increased costs hurt Chipotle’s overall profit, and now analysts believe the charges may be trickled down to consumers.

Thus far the price of a burrito at Chipotle has remained unchanged, but starting in January, rumors have circulated about a possible Chipotle menu price hike. Company executives certainly haven’t struck down the idea when asked about the possibility at investor meetings. When Chipotle released its 2013 fourth-quarter earnings in January, one analyst asked Chipotle in a conference call if the company would risk hurting its brand by raising prices if it didn’t need to; an executive only replied that the company was still deliberating whether to go ahead with the hike.

What’s more, while many Chipotle executives have been weighing the pros and cons of a price hike, others have been considering the sector of the company that is working to maintain its “Food With Integrity” promise. The chain has been applauded for its higher-quality ingredients, and it has been working on its pledge to ultimately strip out all genetically modified ingredients from its menu. Its latest efforts involve substituting a non-GMO sunflower oil for a genetically modified soybean oil it has been using.