Chipotle: Digitalization is 'a huge unlock for restaurants,' analyst says

Chipotle out with his results reporting

strong first quarter earnings a beat on

the top and bottom lines with a nearly

11 percent increase in comparable of

store sales joining us now is Sean

Dunlop Morningstar Equity analyst so

Sean let's get right into this what's

your biggest takeaway from these results

yeah I think a really positive quarter

for Chipotle no matter how you chop it

up on the comp side I believe it was

10.9 percent comp sales growth that edge

door estimate for 8.3 percent on the

margin side we saw those Gap up to 25.6

percent on the Restaurant level against

a guy in the neighborhood of 24 so a

really positive quarter of the market

reaction certainly attests to that maybe

if we had one qualm it would be unit

development lagged a little bit they

opened 41 net new stores and we'd

forecast 61 but given that they

maintained four-year guidance it's more

of a timing issue we think than anything

structural and Sean you've got a hold of

15 50

anything caused you to rethink that

yeah I mean we'll certainly wait for

commentary on the call seal strength

through the first quarter has been

really strong in the dining segment what

we're struggling with a little bit is

consumers are spending about 10 percent

more than they usually do on dining out

and that's not the pattern that we

typically see when you see declining

savings rates when you see

um the sort of macroeconomic pressure

that we've seen increasing use of

revolving credit and this would be

really surprised as we move through the

balance of the year of consumer health

stays this strong it will be interesting

management furnished guidance for the

second quarter it'll be interesting to

see if they're willing to talk about

what they expect over the back half of

the year that's what we'd really expect

to see weakness and we think that to the

extent that that plays out it's going to

be difficult for a restaurant operators

to see too much incremental margin

recapture over the balance of 2023. so

you're a little bit cautious on it uh

based on that how did you feel looking

at the numbers today about the pricing

and how that played into the comparable

store sales

yeah consumers seem to have borne it

very well for Brands like Chipotle for

Brands like Starbucks that you'd

typically think of as boasting pricing

power and and so they've been able to

hold up a little bit better in terms of

margin than we've seen with some of the

more value-driven qsrs McDonald's

reported this morning for example in a

bit of a sequential Decline and

restaurant margins albeit with really

healthy guest traffic so with Chipotle

this is a predominantly price lead

rather than traffic-led comp but for now

they're predominantly affluent consumers

seems to be bearing these price

increases very well it'll just be

interesting to see as we move further

into the year as we see historically low

savings rates where the consumers start

to tighten the belt with a little bit

more time

yeah instead of tightening the belt

Chipotle makes this you know take the

belt off and wear sweatpants doesn't it

Sean uh the operating margins you

mentioned 15.5 that's up from 9.4 and a

dramatic expansion for for a burrito

chain the Stock's up about 30 percent

year-to-date do you just feel like a lot

of that upside is already priced in

we certainly do it at Morningstar yeah I

mean as you think about why consumers

figure restaurants you know value for

the money is high on that list we've

seen declining traffic we've seen

declining items per check industry-wide

and we've seen a widening valuation Gap

as you think about the permeal cost of a

restaurant meal versus an equivalent

meal in the grocery store Channel

given the behavior that we typically see

when consumers are pressured shifting a

little bit away from dining out and that

we haven't seen that yet we're pretty

cautious on the sector writ large now

investors like it because it tends to be

fairly recession resistant a lot of

these companies pay fairly competitive

dividends there's a lot to like in

restaurant land if you need consumer

cyclical exposure but we think a lot of

the upsets priced in Sean are you

expecting a trade down uh from uh a

Chipotle to say say a McDonald's if the

pricing pressures for Chipotle to if the

inflationary environment rather

continues to force some more price

increases

we could see a little bit of that I

don't know that the customer base is

necessarily correlated one to one but we

do typically see consumers trade down

from from fast casual for example into

qsr and we've seen some of that already

we see a little bit from some of the

Full Service dining options into fast

casual into qsr so it's these aren't

necessarily normal Goods where consumers

spend exactly the way you'd expect for

certain consumers a qsr meal might be a

normal good where when they have more

money they'll spend more on it for

others it may be an inferior good where

they're trading into it from a fast

casual like Chipotles that's kind of

what we're monitoring it really is guest

transaction count that we're looking at

over the next couple of quarters they're

always on the Leading Edge of Technology

you mentioned the 34 Chipotle Lanes of

the 41 they've opened 39 percent uh

digital sales pretty impressive number

there and now they've got these all

electric locations starting to open up

this year how does that technology play

into the investor story

yeah it's it's really a huge unlock for

restaurants so you think about uh if I

go in order from a Chipotle at the

counter they don't know that much

information about mayor particularly

from ordering through third-party app

but when I'm ordering through their own

mobile order and payment system or when

I'm ordering through an all-electric

store through the Chipotle lens you know

a lot more about my price elasticity

which which items I tend to order

together and so it offers a much closer

relationship with the consumer it's much

easier to prop up traffic with sort of

personalized offers during a period

where maybe consumer is a little bit

more reluctant to come out to the

restaurant and by and large we see the

biggest restaurant chains like a

Chipotle or McDonald's have the most

robust digital platforms and so we think

they're the best position as we move

into a more challenging environment in

the back half of the Year shares up five

and a half percent after hours Sean

Dunlap good to see you my friend thanks

so much

all right coming up what consequences

could come with the second term from