Despite owning all of its restaurants, Chipotle Mexican Grill (CMG) enjoyed higher margins than peers until 3Q15 due to its strong business model. However, food safety issues affected the company in October 2015, leading to a decline in its SSSG (same-store sales growth) and EBIT (earnings before interest and tax) margins.
In 4Q16, the company posted EBIT of $30.6 million, which represents EBIT margins of 3.0%. In comparison, the company had posted EBIT margins of 10.4% in 4Q15.
Factors that lowered Chipotle’s margins
Due to a rise in avocado prices in October and November 2016, the company’s food, beverage, and packaging expenses rose from 33.8% in 4Q15 to 35.3% of the total revenue. Labor inflation of 5% led to a rise in labor expenses from 26.1% to 27.5%. Occupancy and other operating expenses also rose as a percentage of total revenue by 0.6% and 2.6% due to sales deleverage from negative same-store sales growth (or SSSG).
To improve its SSSG and win back its customers, the company increased its marketing and advertising spending, which led to a rise in its general and administrative expenses by 1.6%. The depreciation and amortization expenses also rose 0.3% due to increased investments in food safety measures.
Analysts expect Chipotle’s EBIT margins to improve in 2017 to 8.5% compared to 0.9% in 2016. Sales leverage from positive SSSG is expected to drive Chipotle’s 2017 margins. Next, we’ll look at Chipotle’s 4Q16 EPS.