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Chipotle Is A Tasty Bet For The Long Run

April 26, 2014 | About:
shash63

shash63

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Despite increasing competition and diet-conscious customers, the restaurant industry's sales have been rising . In 2 years, annual restaurant sales have almost tripled from $232.3 billion to $586 billion and are projected to reach $684 billion in 2014. This growth has led various restaurants to increase their footprint by increasing their restaurant chains, with many new players also entering this market.

For those who like to opt in food and beverages segment stocks, can always look at Chipotle (CMG) and Cheesecake (CAKE). Both these companies are recording growth. These two are established players as well.

Chipotle is currently on a growth run as a result of efforts to modify its food menu and is also expanding its chain of the restaurants globally. The traffic at Chipotle seems to be increasing, which is helping its growth. Fiscal 2013 was all growth for Chipotle. It expanded its chain by adding 185 new restaurants and recorded a total revenue of $3.21 billion, up by 17.7% from the previous year. The bottom line was also impressive, coming in at $327.4 million, up by 17.8%.

The growth momentum has continued in the first quarter of 2014, with Chipotle adding 44 new restaurants and recording revenue of $904.2 million, up by 24.4% from the same quarter last year. Compared with the year ago quarter, comparable restaurant sales were up by 13.4% and net income was $83.1 million, up by 8.5%.

As the growth continues, it is focused on "food with integrity" that resonates well with its customers. Moreover, its announcement about eliminating genetically modified organisms, or GMOs, from its food by the end of 2014 has been received well by health-conscious consumers as well as investors. For 2014, it has plans to open 180-195 restaurants to sustain the growth trajectory.

Chipotles is known for using fresh ingredients. But, over the years, the prices of the fresh ingredients has been constantly rising . This does effect the margins and the earnings of the company. To offset this, it plans to increase prices in the menu to boost its profits in the future. The share price of Chipotle was pushed down due to profits being hit by an increase in ingredient costs. The price rise in the menu is certainly good news for the investors and I can fore see a better bottom line in the future.

The anticipated price rise would be in mid-single digits (~5%) by the end of the quarter. This will certainly offset the rising food cost for the burrito chain. A 5% increase would raise the cost of Chipotle's chicken burrito from $7.81 to about $8.20 in New York. Most consumers probably won't even notice because the price hikes will only amount to a few dollars and cents.

Although stock price did fall as the news of price hike was aired, but this is a temporary fall and the patient investors are always the winners.

Conclusion

Chipotle has been constantly expanding its outlets and at an impressive growth rate. So, it seems to be a good bet for investors.


Rating: 1.0/5 (3 votes)

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Comments

Dr. Paul Price
Dr. Paul Price premium member - 4 months ago

What is CMG worth and how would you justify that price?

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