Chipotle’s same-store sales have been impressive with the company posting double-digit growth for the last four quarters. Most of this growth has been driven by traffic gains. Late in the first quarter, however, the company implemented a price increase in its Pacific region, which accounted for 1.5% of CMG’s 2Q11 10% comp. After three years of nearly no menu price increases outside of this recent pricing in the Pacific, management decided to implement a 4.5% price increase on average across about 80% of its restaurants. Management started to roll out this pricing during the third week of June and expects it to be fully implemented by the end of August, resulting in a 3.5% increase during the fourth quarter. Due to the timing of the increase, the company expects to realize about two-thirds of the menu price increase during the third quarter.
Although management commented during its second quarter earnings call that they had not yet “seen any evidence of customer resistance” from the recent price increases, I would not be surprised to see traffic trends fall off slightly on a two-year average basis, particularly in this current environment. Either way, the traffic comparisons get increasingly more difficult over the next few quarters on a one-year basis. It is important to remember that CMG’s traffic trends turned negative in late 2008 into 2009 when the company rolled out an incremental 6% price increase. The macro environment was partly to blame at that time, but CMG’s traffic trends did not turn positive again until it fully lapped this price increase in 4Q09.
The magnitude of the company’s current price increase is not as great as the prior increase and recent traffic trends have surprised to the upside, but this price increase is coming at the same time the company’s traffic comparisons get increasingly more difficult. That being said, I would not be surprised to see CMG’s traffic growth decelerate to a low single digit rate by the fourth quarter after growing by closer to low double digits for the last four quarters.
On a same-store sales basis, I am currently modeling an 8.3% comp for the third quarter, which assumes a 30 bp acceleration in two-year average trends as I am expecting higher pricing to offset the slight deceleration in traffic trends. In the fourth quarter, my 6.5% comp estimate assumes two-year average trends decelerate slightly, largely as a result of a fall off in two-year average traffic trends.
In 3Q11, the consensus has bakes in a sequential acceleration in revenue growth, which will be difficult to achieve. As a result of a more conservative top line trends, our EPS estimates are $0.04 below the street.