Why Chipotle’s labor, occupancy, and other costs are important

Labor, occupancy, and other costs

Chipotle Mexican Grill (CMG) reported $230 million in labor costs, $59 million in occupancy costs, and $111 million in other operating costs in 3Q14.

Labor costs

In 3Q14, labor costs accounted for 21.2% of the revenues. Labor costs declined by 1.6% year-over-year (or YoY)—compared to 22.8% in 3Q13. Labor costs have been decreasing as a percentage of sales. This is mainly due to higher revenues.

Revenues increased by 31% YoY. This is a good example of using operating leverage. The costs of operations decrease as the sales increase.

The restaurant stocks are found in exchange-traded funds (or ETFs) like the Consumer Discretionary Select Sector SPDR Fund (XLY).

McDonald’s (MCD) has been facing constant pressure to increase wages. Competitors—like Panera Bread (PNRA) and Fiesta Restaurant Group (FRGI)—will be affected if a minimum wage bill increases the minimum wage.

Occupancy costs

Occupancy costs accounted for 5.4% of the percentage of revenue. They decreased by 63 basis points YoY—100 basis points = 1%. Occupancy costs were 6.1% in 3Q13. The costs also declined because higher revenues spread the cost of operations.

Other operating costs

Other operating costs accounted for 10.2% as a percentage of sales. They declined by 54 basis points YoY—compared to 10.8% in 3Q13. Other operating costs include bank and credit card fees, restaurant maintenance and utility costs, and marketing and promotional costs. The decrease was mainly due to lower marketing costs.

Operating profits

All of these costs resulted in an operating income of $207 million in the quarter—compared to $137 million in 2Q13. Operating profit margins also grew to 19% during the quarter from 16.5% in 2Q13.

In the next part in the series, we’ll discuss Chipotle’s general and administrative costs.