CMG - The benefits of pricing are in the rear view mirror.
CMG 2Q23 Non-GAAP EPS of $12.65 beats by $0.37 and Revenue of $2.51B (+13.6% Y/Y) misses by $20M. Comparable restaurant sales increased 7.4% missed by 1bp but missed by 100bps relative to the whisper number.
Some Concerns coming out of the earnings call: Lower SSS Guidance suggest slowing traffic or mix issues (pricing was always going to roll off); without more pricing food/labor costs have no where to go but up; incremental G&A step up at the same time the company gets more aggressive to grow internationally; they don't have the people issues fixed; the 2Q23 revenue miss suggest opening/productivity issues.
CMG SSS Guidance in 2023:
SSS Guidance
Low High Mid
3Q23 1.0% 6.0% 3.5%
2Q23 4.0% 9.0% 6.5%
1Q23 7.0% 9.0% 8.0%
Summary Thoughts
- In 2Q23, Chipotle experienced strong growth, with sales increasing by 13.6% to reach $2.5 billion, driven by a 7.4% comparable sales growth.
- In-restaurant sales grew by 16%, and digital sales represented 38% of the total sales.
- Restaurant-level margin increased by 230bps YoY, reaching 27.5%.
- Adjusted diluted EPS grew by 36% YoY to $12.65.
- The company opened 47 new restaurants
- Chipotle focuses on five key strategies: running successful restaurants with a people accountable culture, sustaining world-class people leadership, making the brand visible and loved, amplifying technology and innovation, and expanding access and convenience.
- Chipotle plans to drive frequency within its existing customer base through its rewards program, Freepotle, and continues to explore creative ways to improve customer engagement.
- Menu innovation - Will we back on the LTO treadmill with an unnamed LTO coming in late August, following the successful Chicken al Pastor which has proven to attract new customers and generate positive social sentiment?
- Working on thru-put - The company invests in technology and innovation to improve the in-restaurant experience, such as the dual-sided grill and third pan rice cookers. Chipotle's Cultivate Next fund supports robotics and automation initiatives, like the development of the "Autocado" device to ease tasks for employees. Expansion and convenience efforts include targeting 255 to 285 new restaurants this year, with over 80% featuring a Chipotlane drive-thru.
- W/O Price Inflation accelerating - COGS decreased by about 100bps to 29.4% due to last year's menu price increases and lower avocado prices. However, elevated costs in beef, tortillas, dairy, salsa, beans, and rice partially offset the decrease. For 3Q23, cost of sales is expected to be around 30% due to higher beef and avocado prices, though the company has diversified its avocado sources to reduce volatility.
- W/O Price Inflation accelerating - Labor costs for the quarter decreased by about 50bps to 24.3% due to sales leverage, but wage inflation partially offset the decrease. For 3Q23, labor costs are expected to be around 25%, reflecting continued labor inflation and seasonally lower sales.
- Other operating costs for the quarter decreased by about 40bps to 13.9% due to sales leverage.
- Marketing costs for 3Q23 are expected to be in the low 2% range before stepping up to around 3% in Q4.
- Investing for future growth - The company is laying the foundation for further international growth, including European operations and a development agreement with the Alshaya Group for the Middle East. G&A for the quarter was $157 million on a GAAP basis, excluding restructuring expenses, it was $153 million. Underlying G&A is expected to be around $125 million in Q3, growing slightly afterward to support ongoing growth. The company conducted an organizational review to support aggressive growth goals, leading to investments in development, digital marketing, and international expansion.
MCD Earnings
MCD is due to report EPS on Friday
MCD 1Q23 Earnings Call Highlights - Consistent Strong Performance and New Initiatives for Future Growth
- McDonald's reported strong numbers with a 12.6% SSS growth across all geographies.
- The company highlighted its core menu and expanded emerging equities, especially in the chicken portfolio. Successful examples include the relaunch of the Crispy Chicken Sandwich in the US and the McSpicy Chicken Sandwich in China. McDonald's also made improvements in its beef offerings, enhancing cooking procedures and buns, leading to improved taste perception scores globally. The Big Mac was prominently featured in various markets, driving beef sales and reaffirming its popularity with consumers.
- Initiatives like the McSmart Menu in Germany, offering smaller, more affordable meals, contributed to double-digit comp sales growth in the country.
- The increase was attributed to the "Accelerating the Arches" strategy, with each growth pillar contributing to the balanced performance.
- McDonald's is doubling down on its existing growth pillars while introducing two new initiatives: accelerating restaurant development and fundamentally rethinking how the company works together through "Accelerating the Organization."
- "Accelerating the Organization" involves implementing horizontal ways of working, standardizing common processes, and making strategic investments in digitizing the organization.
- McDonald's maintained market share leadership in beef through improvements in cooking procedures and other changes.
- Franchise margins remained stable, but elevated cost inflation affected European franchisees' cash flows.
- The Global Business Services organization (GBS) will play a key role in driving efficiency and digitization, providing value to the business, franchisees, and suppliers.
What to Expect In 2Q23
- In 2Q23 strong performance and global momentum continues with global SSS estimate of 9.4%.
- McDonald's should report at least $2.78 in 2Q23 EPS, up 9%.
- Franchise margin dollars should see continued growth, while company-operated margins were impacted by elevated commodities and wages.
- The MCD marketing machine continues in 2Q23 with the excellence was showcased through campaigns like "Raise Your Arches" in the UK, and the the Grimace Shake (a berry-flavored milkshake) that was sold at McDonald's restaurants in the United States during June 2023. You can see the spike in traffic in the Placer.AI data in the chart below.
- 2Q23 Operating income of $2.9B up 12%. Operating margin of 46.2% op 80bps YoY
- The company will likely still expect continued macroeconomic headwinds for the year.
