Why look at same-store sales?
In the last part of this series, we discussed that Chipotle Mexican Grill (CMG) grew by 56% year-over-year (or YoY). It was driven by strong revenue growth.
In the restaurant industry, revenues are mainly driven by same-store sales and unit growth. Same-store sales are the sales at existing restaurant locations. It’s measured as a percentage growth or a decline from the previous comparable period.
Same-store sales increase when more customers visit the restaurant—traffic—or customers spend more per order—ticket or average check.
Solid same-store sales growth
CMG had a 19.8% same-store sales growth in the third quarter. The company reported double digit same-store sales in the previous two quarters—at 17.3% in 2Q14 and 13.4% in 1Q14.
Same-store sales increased in the third quarter because of an increase in traffic. Also, the average check increased by 8.5%. The average check increased because of a 6.3% increase in the menu price and catering business. We discussed the menu price increase in the 2Q earnings overview.
CMG’s same-store sales growth contributed to the 31% revenue growth. It increased to $1.08 billion—from $0.82 billion as of the third quarter that ended on September 30, 2013.
Improvement in throughput increases transactions
An increase in traffic is a positive indicator for restaurant stocks—like those included in the Consumer Discretionary Select Sector SPDR Fund (XLY). XLY includes Yum! Brands (YUM), McDonald’s (MCD), and Darden Restaurants (DRI).
At CMG, there will usually be more traffic during peak lunch and dinner hours. The staff prepares the food fresh in the restaurant and serves it directly to the customers. With this combination, it’s important to increase the employees’ output at the assembly line. During the quarter, CMG was able to increase the output by six transactions during the peak lunch and dinner hours—compared to last year.
Besides same-store sales, restaurant revenues also benefit from new restaurant units. We’ll discuss CMG’s unit growth in the next part in the series.