Labour shortages plus rising food and energy prices have soured Wall Street’s appetite for restaurant stocks in recent months. The S&P 500 restaurant index has fallen 9 per cent since the start of the year. This industry, which makes thin profit margins at the best of times, anticipates tougher times ahead.
Not all of them will cause indigestion, however. Chipotle Mexican Grill, best known for its burritos and tacos, has thus far shown the ability to pass higher costs on to customers. Sales across its 2,966 locations rose more than a fifth to $1.96bn in the final three months of 2021, beating expectations. Comparable restaurant sales climbed more than 15 per cent.
Lex’s proprietary burrito inflation index points to a 10 per cent increase in input costs for that handy favourite last year. Costs grew strongly during the quarter — especially for beef, avocados and other ingredients. Worker costs also jumped after the company raised the average minimum wage from $13 to $15 an hour.
Even so, operating margins actually grew 80 basis points to 8.3 per cent during the quarter. Getting Americans to pay more for their guacamole and chips helped. Chipotle raised menu prices by 4 per cent in December and the chain said more increases should follow this year. Shareholders eat up that sort of confidence, putting a forward earnings multiple of 46 times on its shares.
The company’s emphasis on technology also gives it an edge. Chipotle sourced nearly half of its sales from digital channels last year. Again, it could pass on the fees charged by third-party delivery platforms like UberEats and Grubhub to clients.
Big, well-capitalised chains have a bright future. The pandemic forced many independent eateries to go under. This allows chains such as Chipotle room to fatten their market share — particularly in smaller towns where margins beat those in big cities. Chipotle now plans 7,000 restaurants in North America over time, compared to its prior goal of 6,000 locations.
Casual dining only deserves a premium valuation if the restaurant can protect its profitability. Chipotle is showing it is equal to that challenge.
Our popular newsletter for premium subscribers is published twice weekly. On Wednesday we analyse a hot topic from a world financial centre. On Friday we dissect the week’s big themes. Please sign up here.