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Chipotle Mexican Grill's (NYSE: CMG) turnaround took another step forward last quarter, as comparable sales growth accelerated on the back of rising digital sales. This growth enabled Chipotle to post adjusted earnings per share of $1.72 for Q4, nearly 30% ahead of the analyst consensus.
Not surprisingly, investors cheered this big earnings beat. Chipotle stock jumped more than 11% on Thursday, briefly surpassing $600 for the first time in more than three years.
Chipotle stock performance, data by YCharts.
Chipotle's growing momentum and the numerous sales-driving initiatives it has in the pipeline should allow the fast-casual pioneer to achieve strong earnings growth over the next few years. But without further acceleration in its comps growth, Chipotle will have trouble living up to its lofty valuation.
An excellent end to the year
In the third quarter, Chipotle posted 8.6% revenue growth on a 4.4% increase in comparable restaurant sales. Adjusted EPS surged 62% year over year, thanks to strong cost control.
However, skeptics weren't impressed by those results, noting that comparable restaurant traffic declined 1.1%. Higher menu prices and larger order sizes, spurred by the late 2017 addition of queso to the menu, drove more than 100% of Chipotle's third-quarter comp sales growth. The fear was that these tailwinds would fade in the fourth quarter, dragging down Chipotle stock.
Chipotle proved the doubters wrong last quarter. Comps growth accelerated to 6.1% as traffic trends turned solidly positive. (Comparable restaurant transaction counts increased 2% in the quarter.) This performance contributed to a 10.4% increase in total revenue to $1.2 billion.
Chipotle posted strong comparable sales growth last quarter. Image source: Chipotle Mexican Grill.
While revenue growth accelerated in the fourth quarter, Chipotle posted a fairly pedestrian 11% increase in adjusted EPS, roughly in line with its sales growth. Higher marketing and promo costs from an ad campaign and free delivery promotion, extra costs related to the growth of Chipotle's delivery business, and higher depreciation and amortization expense driven by store upgrades offset cost savings elsewhere in the business.
Can Chipotle keep the momentum going in 2019?
Chipotle expects comp sales trends to remain strong in 2019. The company is projecting full-year comps growth of 4% to 6%, with a modest 1.7-percentage-point lift from higher menu prices. This outlook implies that traffic growth will continue to accelerate. That was probably a big reason behind Chipotle stock's rally on Thursday.