What happened
Shares of Chipotle Mexican Grill (CMG 1.07%) are up 14% at 1:38 p.m. EST on Feb. 7, following the release of the company's fourth-quarter results after trading hours on Feb. 6. In short, the market loved Chipotle's fourth-quarter results, which improved nearly across the board.
Maybe most importantly -- and likely a big reason behind investors' exuberance today -- the fast-casual restaurant chain reported 6.1% comps growth. This measure of sales at restaurants open at least 12 full months is by far Chipotle's best in nearly two years.
So what
It wasn't just positive comps growth; Chipotle has reported pretty decent overall comps the past few quarters. It was where the comps growth came from, specifically that the company reported its first comps increase in transactions in well over a year in the quarter.
Image source: Chipotle.
This is a sharp reversal of what had been an ongoing problem for Chipotle. While comps have been up the past few quarters, the rise was entirely driven by higher prices and increased ticket side from add-ons like guacamole and queso. Furthermore, bigger tickets have actually had to offset weaker traffic, as Chipotle's comp transaction count was down about 2% in the first half of the year and down almost 1% in the third quarter.
Now what
The interesting thing about Chipotle's big improvement in traffic is that it's possible a lot of that "traffic" isn't spending much time -- or even any time -- in Chipotle restaurants. On the earnings call, CEO Brian Niccol pointed out that digital sales -- app and online orders which include delivery partners -- made up about 11% of sales in all of 2018 but surged 66% in the fourth quarter, making up 13% of total sales.
And that's where you find the transactions increase.
Why does this matter? In short, because take-out and delivery sales can be huge profit drivers for Chipotle, even more than eat-in incremental orders. That's because to a large extent, existing overhead expenses like occupancy don't increase with higher transactions, and even some variable expenses like labor costs have room to absorb more orders before needing to be increased.
And this increased operating leverage is huge for Chipotle, because it means that the incremental margins -- the profits from this extra traffic -- grow the bottom line in a much bigger way.
Based on guidance, Chipotle management seems to think that the traffic boost from digital orders it saw in the fourth quarter will continue to roll into 2019. The company's full-year guidance called for "mid-single-digit" comps growth, indicating that they're seeing a continued trend of transaction comps growth.
And it's likely investors can continue to expect more actions focused on driving growth. I'll leave you with this quote from Niccol:
Our biggest lever remains sales and transactions growth. Over the past year, we've become more strategic about pursuing projects that generate sales growth and healthy returns. We are in the process of building sales growth layers for multiple years and putting them through our stage-gate process to ensure we are learning and iterating prior to national launches. While we are focused on winning today, we are also cultivating our future.
