Earnings Results: Chipotle continues growth but says it’s seeing fewer lower-income customers as prices rise

United States

Chipotle Mexican Grill Inc. on Tuesday reported continued growth, with third-quarter profit beating analysts’ expectations, though its price increases have caused lower-income customers to pull back.

Chipotle CMG, +2.47% shares initially rose almost 4% in extended trading before losing those gains during the company’s earnings call, finishing after-hours trading down 1.5%. Shares had risen 2.7% in the regular session to close at $ 1,588.19. 

The fast-casual restaurant chain reported that transactions decreased 1% in the quarter, though comparable-restaurant sales increased 7.6%, beating analysts’ expectation of 7.3%, and that it opened 43 new restaurants.

On the company’s call with analysts, Chief Executive Brian Niccol said lower-income customers reduced their purchase frequency during the quarter, though he said the majority of the company’s customers are higher-income, whom he said earn $ 75,000 a year or more.

“We’re starting to see pressure on the low-income consumer,” Niccol said, adding that “everyone is paying the price” amid inflation. The company has raised prices as its costs, including for labor, have increased 20% over the past two years, he said.

Niccol said pricing is “the last lever we pull,” and that for customers, being able to buy a burrito for $ 9 or less remains a “tremendous value.”

Chief Financial Officer Jack Hartung said on the call that earlier this month, the company increased menu prices in about 700 restaurants “to address pockets of outsized wage inflation” — in other words, to offset wage increases.

Chipotle employees are among those who have taken part in a growing unionization push around the country. Workers at a Lansing, Mich., Chipotle store voted to unionize in August, becoming the first of the chain’s stores to do so. The company’s executives did not address unionization on the call, but Niccol and Hartung repeatedly talked about the importance of attracting and retaining well-trained staff.

Chipotle’s executives also reported that they have seen consumer behavior returning to “normal,” meaning less digital and more in-restaurant orders. In the third quarter, in-restaurant sales rose 22.1% year over year. Digital sales made up 37.2% of food and beverage revenue, compared with 41.9% in the first quarter and 39% in the second quarter.

See: Chipotle workers overwhelmed by online orders and furious customers

The company reported third-quarter net income of $ 257.1 million, or $ 9.20 a share, which beat the $ 9.19 a share analysts surveyed by FactSet had expected. That compared with $ 204.4 million, or $ 7.18 a share, in the year-ago period. Adjusted for employee-separation expenses, duplicate rent, stock-based compensation and other costs, earnings were $ 9.51 a share. Revenue rose to $ 2.22 billion from $ 1.95 billion in the year-ago quarter, falling shy of the $ 2.23 billion analysts expected.

The company expects fourth-quarter comparable-restaurant sales growth in the mid- to high-single digits.

Shares of Chipotle have fallen about 9% year to date, compared with a 19% loss for the S&P 500 SPX, +1.63% index.