Chipotle says it's seen no impact yet on consumers from California wage increases

By Bill Peters

Company says automated machinery to make salads, bowls and guacamole could appear in restaurants in the second half of this year

Chipotle Mexican Grill Inc. does a lot of business in California, where a new law raising the minimum wage for fast-food workers to $20 an hour took hold this month.

But as Wall Street analysts try to diagnose the impact on corporate profits, executives at the Mexican fast-casual chain on Wednesday said they've seen little impact on consumer behavior - yet - even as they raise prices in tandem with the higher pay.

"We're not seeing any kind of change in consumer behavior yet," Chief Financial Officer Jack Hartung said on Chipotle's (CMG) quarterly earnings call on Wednesday. "But it's only been a matter of a few weeks so far. So, we'll keep a close eye on it."

He said that the increase in California - where Chipotle has 475 restaurants, a higher number than in any other state - represented a 20% bump in pay for workers there. The company raised menu prices in California by 6% to 7% in response.

Still, Hartung said that overall, he expects labor costs as a share of sales to stay the largely the same in the second quarter. But he said the California wage increases would shave a bit off margins overall.

After two years of rising prices for essentials, lower-income workers have had a harder time keeping up. Restaurants, looking to guard or pad their margins, often raise menu prices in response to pay increases. Some analysts, in turn, have worried about the impact of more expensive fast food on demand, particularly among other low-income shoppers.

Hartung said that burritos at the chain would still be "reasonably priced," at around $10. But he said compared to other restaurants, the chain has tried to keep its prices affordable.

Investors, for now, seemed to shrug all of that off. Shares of Chipotle (CMG) rose 3% after hours on Wednesday, after the chain reported first-quarter results that beat expectations, helped by demand for limited-time menu items and the company's increased focus on processing orders faster.

The company reported first-quarter net income of $359.3 million, or $13.01 a share, compared with $291.6 million, or $10.50 a share, in the same quarter last year. Adjusted for an increase in legal reserves, Chipotle earned $13.37 a share.

Revenue rose 14.1% to $2.7 billion, and same-store sales rose 7%.

Analysts polled by FactSet expected Chipotle to report adjusted earnings per share of $11.69, on revenue of $2.68 billion and same-store sales growth of 5.4%.

Digital sales represented 36.5% of total food-and-beverage sales. The company opened 47 new restaurants during the first quarter, with 43 including a drive-thru "Chipotlane."

"We had another outstanding quarter driven by our improvement in throughput and successful marketing initiatives, including braised beef barbacoa and chicken al pastor, which drove strong sales and transactions," Chief Executive Brian Niccol said in a statement.

For the full year, Chipotle said it expects same-store sales growth in the "mid- to high-single-digit range." Wall Street expects a same-store sales increase of 6.1% for the year, according to FactSet.

Chipotle reported the results in the middle of what it calls "burrito season," which runs from March to May and tends to be the chain's busiest time of the year. Menu-price increases over the past two years have helped push sales higher, as restaurants test consumers' willingness to pay more and try to offset employee pay raises and fluctuating ingredient costs.

Some analysts have said the chain's "Chipotlanes" could help digital sales. Wedbush analysts expected popular items like carne asada and chicken al pastor likely drove same-store sales higher during the first quarter.

However, the stock's steady march upward this year leaves less room for error, and analysts have said they're worried about sales trends moving further into 2024.

Stifel analysts, in a research note this month, also said that prices at restaurants, which are still up more sharply than grocery prices, risk wearing out lower-income consumers.

In its previous earnings call in February, Chipotle said sales grew across all of its consumer segments, including those who earned less than $40,000 a year. However, McDonald's Corp. (MCD) that month said that lower-income diners weren't spending as much.

"To that end, we anticipate restaurants may soon be entering a more promotional phase as many need to reset their price-value perception with their lower-income customers to improve transaction performance," the Stifel analysts said.

Chipotle has been testing automated machinery to make salads, bowls and guacamole that could save money and speed up service. Management on Wednesday said that technology could make its way into restaurants by the second half of this year. And they said they'll be talking about throughput - or ways to handle more orders more quickly and increase sales - for a long time.

"When you know the line moves quickly, you're willing to get in line," Niccol said on Wednesday's call.

-Bill Peters

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04-24-24 2106ET

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