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Chipotle Mexican Grill (CMG +6%) is sizzling today after delivering a monster earnings beat on solid top-line growth in Q3. Same-store sales of +5% landed toward the high end of the quick service restaurant chain's previous low to mid-single-digit forecast. With just quarter left in FY23, CMG felt confident in achieving its prior mid to high-single-digit comp guidance, translating to a potential sequential improvement in Q4.

• On the backs of a healthy +5% comp, fueled by recent menu pricing action and positive transaction comps that accelerated throughout Q3, ending up over +4%, CMG expanded overall sales 11.3% yr/yr to $2.47 bln, consistent with analyst expectations.
• The strong top-line growth kept margins at solid levels. Restaurant-level margins expanded by 100 bps yr/yr to 26.3%, assisting a 19% jump in CMG's adjusted EPS to $11.36, clearing analyst estimates easily.
  • Cost of sales remained around 30% in Q3, as inflation across several commodities offset the benefit from last year's menu price hikes. The cost of sales in Q4 will likely stay in the 30% range.
• CMG has been reducing staff turnover, which is pertinent to keeping labor costs down and productivity up. CMG has improved turnover to levels better than before the pandemic by focusing on a people-accountable culture.
  • However, labor costs are still elevated, ticking only 20 bps lower yr/yr to 24.9%. CMG anticipates costs hovering in this area in Q4.
• Another strategy crucial to CMG's long-term success is domestic and international expansion. In the U.S., CMG opened 62 additional restaurants, 54 of which had a Chipotlane, i.e., a drive-thru (another focal point of the company to keep customer wait times down). CMG remains on track to hit its 255-285 new restaurant target this year. The company also targets 285-315 additional locations in 2024, of which 80% will feature a Chipotlane.
  • On a side note, permitting and inspection delays prevent CMG from reaching the high end of its 8-10% new restaurant opening guidance in 2024. However, management anticipates approaching 10% by 2025.
• Internationally, CMG entered a new market in Canada, keeping pace with its plans to continue expanding. Overseas, CMG outlined a plan for Europe to deliver economics supporting accelerated growth, such as aligning systems and training tools with the company's U.S. operations. In the Middle East, CMG is collaborating with the Alshaya Group to support the openings of new locations next year.

Overall, Q3 results were what we have come to expect from CMG, making its underwhelming Q2 report a likely one-off. By marketing how it prioritizes quality and freshness, CMG stands out positively in a fragmented quick-service Mexican-themed restaurant environment. Headwinds still abound, especially surrounding labor costs; passing on higher wages, such as the new minimum wage law in California, where CMG has around a sixth of its restaurants, could be met by significant consumer resistance. However, thus far, CMG has proven that consumers are still willing to accept higher menu prices, further reflecting the company's competitive edge.