Chipotle Mexican Grill Inc. (NYSE:CMG) released fourth-quarter and full-year earnings this week and, by most accounts, the numbers were solid.
During the 2012 period, the fast-casual restaurant operator reported revenue of $2.73 billion, up 20.3% from 2011. For the quarter, revenue rose 17.2% year over year to $699.2 million.
On a more worrisome note, while restaurant-level operating margin for the year increased 110 basis points to 27.1% on higher overall restaurant sales, fourth-quarter operating margin fell 150 basis points from the year-ago period to 24.6%, thanks largely to higher food costs. As a result, while Chipotle’s 2012 net earnings per share grew nearly 30% from 2011 to $8.75, year-over-year net income for the fourth quarter rose a still decent (but much less impressive) 7.7% to $1.95 per share.
Furthermore, same-store sales rose only 3.8% for the quarter, down from the previous quarter’s comparable-store increase of 4.8%. As fellow Fool contributor Demitrios Kalogeropoulos pointed out on Tuesday, that also barely bested Taco Bell operator Yum! Brands, Inc. (NYSE:YUM)‘s domestic comparable-store sales of 3% but remained a far cry from Panera Bread Co (NASDAQ:PNRA)‘s solid 5.1%. As such, many investors are frustrated the company has so far avoided price increases to make up the difference.
The customer’s always right
What’s the problem with this thinking? By not raising prices in today’s difficult economic climate, Chipotle is wisely building priceless customer loyalty. While they’ve made clear they’re open to eventually increasing prices as the economy continues to improve, in the meantime they’ve opted instead to focus on increasing foot traffic and building transaction momentum. When Chipotle does finally choose to raise prices, then, its current margin issues will disappear faster than one of its burritos.
In addition, Chipotle Mexican Grill Inc. (NYSE:CMG) still generates plenty of cash and boasts high current returns on invested capital of 23.06%. As a result, many investors have continued to remain critical of Chipotle’s reluctance to increase its rate of location expansion. Instead, Chipotle has continued to use its cash to intelligently avoid leverage while maintaining a sustainable rate of location expansion. By the end of 2012, the company managed to increase its restaurant count 14.9% by opening 183 new locations, including 60 restaurants in the fourth quarter alone, bringing its total number of locations to 1,410.
While that may sound impressive, note that Yum! Brands managed to maintain its breakneck pace of expansion to open 949 new units in the last year alone. What’s more, Yum! Brands management has stated they intend to open an even higher number in 2013, and if their recent Taco Bell commercials featuring celebrity chef Lorena Garcia are any indication, you can bet the fast-food behemoth has every intention of stealing customers from Chipotle by dispelling the lower-quality stigma surrounding its food.