Meanwhile, profitability wasn't any better. Restaurant level operating margin was 26.3% falling 110 basis points year over year. Here again, the company shows increased signs of struggle from higher food costs. This is the second consecutive quarter of margin erosion after the company shed 150 basis points in the fourth quarter.
I've made this point once before: Food costs took 33% of Chipotle's revenue is a cause for indigestion. As long as food costs remain at such a high percentage of revenue, this will continue to add pressure on management to raise menu prices. The good news here is that the 33% in this quarter is 50 basis points lower than what Chipotle reported in the fourth quarter, which led to a 16.5% jump in operating income.
How Well Is the Strategy Growth Working?
This is the million-dollar question. Management believes in its aggressive growth objectives. That's all well and good. But at some point this business will need to slow its expansion strategy and focus on current operations. The company plans to open 165 to 180 new restaurants this year. Meanwhile, there are no signs that food costs are going to stop rising.
To that end, McDonald's, which once seemed impervious to such macro matters has recently decided to remove its Angus third-pounder from its menu by the middle of next month. In other words, McDonald's is seeing no cost-benefit to keep selling the burgers while the costs of beef continue to rise. Plus, given the fact that Chipotle's menu items were already selling at a premium to McDonald's menu, how will Chipotle respond?Can management justify raising prices while at the same time risking an already dire comps situation? I don't believe the company has a choice. If it still plans to open the number of stores, these costs will need to be offset somehow. And given the unpredictable nature regarding food costs, this (at least) is one area of its execution it can control. The unknown here, is how customers will respond.