Key points:
- Chipotle returned to comp-sales & traffic growth but the trend is more volatile as that growth is being driven by pulsing LTOs. Moreover, it’s having to eat inflationary pressures, which is resulting in margin compression.
- Sprouts has seen more even comp-traffic improvement and volume (UPT) is also improving. With results, management increased earnings guidance, slightly.
- The better results from the two suggest a lot of the shortfall at the end of LY was self-inflicted and not macro.
With in-line top-line results for Chipotle and Sprouts, we wanted to return to a story that we wrote last October - Sprouts and Chipotle– Is the US consumer cracking? after the two issued soft Q3 results / Q4 guidance, which led the business press to squawk about a weakening consumer. We disagreed and opined that it was due to: sloppier execution on the fundamentals, adverse price perceptions, and in the Chipotle case, reduced visits due to the rapid update in GLP1s for weight loss by a large segment of its consumers -- the more affluent. By contrast, that macro trend is likely pushing more share-of-stomach into produce and better-for-me items, and, as such, is a tailwind for Sprouts.
Chipotle delivered comp-sales / -traffic / -ticket of +0.5% / +0.6%/ -0.1% vs. Advan observed -1.2% / -1.1% / -0.1%, with the difference in traffic likely due to delivery, catering, and grab & go. CEO Scott Boatwright said, “In addition to improvements to in-restaurant execution, this performance was supported by the [new] high protein line, the return of Chicken Al Pastor store, and the launch of Cilantro-Lime Sauce, all of which helped drive incremental transactions. We also continue to invest in value for our guests by pricing below inflation because we believe reinforcing our value proposition is the right thing to do in this environment.“ The investment in “price” and service came at the expense of -250bps of restaurant-level margin (still at an incredibly healthy 24% level).
As shown in the chart above, the Chicken al Pastor Delivery Deal: $0 delivery fee from Feb 14–28 on $10+ orders, requiring a Chicken al Pastor entrée and the National Tortilla Chip Day: A three-day promotion involving free Chips and Queso Blanco was active around February 23rd were quite significant to traffic (and helps explain the delta between reported and observed traffic.) On the call, CFO Adam Rymer said, “In March, there was a little bit of softening in our trends right around the time where the Iran conflict began, but then we saw the nice step-up in April.. Specific to April, we saw a nice step-up in April. Part of it was the Easter shift. Easter was about two weeks earlier than it was the prior year, but a bigger part of it was the launch of Cilantro Lime Sauce. It's really done an amazing job. It's actually outperforming Red Chimichurri, which was our most popular sauce up until that point and the incidence is about 2x. And then, of course, the rewards relaunch. So we believe all of those things contributed to a nice step-up in April.”
Sprouts delivered a -1.7% comp-sales decline, with comp-ticket up “low-single-digits” and -traffic down. We estimate that traffic worsened by about -270bps QoQ. E-commerce sales increased +10% and contributed +150bps to the comp. Observed traffic (per Advan) worsened -360 bps QoQ to -2.4% on comp basis and observed ticket increased +1.9% (and so, right in line with the reported figures). In our preview in late March, we had suggested a comp figure of -2-3%, as such, the report was less bad. Moreover, as the chart above shows, April is much better than February / March. Sprouts is also looking to rebuild basket size (UPT) and observed dwell time (average) increased YoY, both nationwide and in Sprouts’ home market, Arizona. (Increased dwell time in the store is more shopping, more foraging, and more items in the basket.)CFO Curtis Valentine, “We're seeing some slight improvement in traffic, some slight improvement in units as we get into the second quarter… Feb was our worst month of the quarter. January and March looked pretty similar. As we've evolved into April here, we are just slightly ahead of the midpoint of the guidance for the comp for the quarter.” And on geographic trends, Valentine said, “Maybe just a little bit of additional [sales] pressure in the Southwest than in the Southeast,” which is what Advan previewed.
Improving the perception of Sprouts’ value has been a key initiative of the company and CEO Jack Sinclair said, “[A] theme core to the DNA of Sprouts is making healthy eating accessible andaffordable. It always starts with our assortment. And we're working to bring healthy, delicious meal solutions such as wellness bowls under $10, $5 Sushi Wednesday and our $4.99 sandwiches… And I'm kind of encouraged by certain categories in terms of when we've done some price investments and some response to that. And I'm encouraged in some of the work that we're doing in our deli departments and increasing the options for people to access healthy, cheaper food direct from Sprouts… We continue to test additional pricing opportunities. We're reshaping our promotional plans to be more streamlined and targeted on driving greater value on the categories and items that matter most to our customers. We continue to invest in talent and technology to strengthen our operating model and build the capabilities needed to scale.“ Said differently, they aren’t there yet. More work to be done.
Executive Nick Konet, “Our focus is twofold. It's to try to put a few more items in the basket and also to get our core customer to come back more often because those everyday essentials are more within reach for them. So that's how we're looking at the pricing activity and how we measure it.” Above, we touched on the improvement in dwell time. In Arizona, observed visit frequency is still down, and so more work is to be done. (Nationwide, the observed metric is distorted by the high rate of new openings.)
On its new loyalty program, Sinclair said, “Our loyalty program continues to scale and is a strategic lever to deepen the customer engagement. We're seeing positive customer response to both broad-based and targeted offers, including loyalty multipliers….. Building on first quarter insights, we're adding resources to increase the pace of testing and learning and investing in capabilities and tools needed to turn what works into scalable programs.” Said differently, they aren’t there yet. More work to be done.
