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Why Chipotle Mexican Grill Is an Interesting Buy

August 08, 2014 | About:
Suravi Thacker

Suravi Thacker

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A company which provides a return of 593% in the span of 5 years is definitely worth watching. Chipotle Mexican Grill (CMG) is one such company which has been a commendable player in the restaurant space. Its share price has appreciated by 1297% since its inception in February 2006. The food company has been growing its presence not only through new store openings, but also through higher sales at the existing stores. This means that its comparable store sales growth has been amazing.

The casual restaurant chain reported its second quarter results this month, which smashed the Street’s expectations. Its share price soared as the company outperformed the estimates. Let us check.

Blockbuster numbers

Revenue jumped a whopping 29% over last year, clocking in at $1.05 billion. The top line was driven by same store sales growth of 17.3%, much higher than 10.5% expected by analysts. The comparable store sales grew mainly because of higher traffic and an increase in prices. It is actually interesting to see that restaurant traffic surged despite an increase in product prices by 6%, on an average. Therefore, customers were not affected by the fact that Chipotle’s products have become expensive. Another reason why sales improved was the addition of 45 new restaurants during the quarter.

It was indeed important for the casual dining chain to increase its menu prices since food costs had been rising at a fast pace, especially in the last holiday season. Harsh winters had hampered sales at most of the food chains, resulting in lower top line as well as a declining bottom line for many food retailers.

Despite higher costs, Chipotle’s earnings jumped remarkably to $3.50 per share from $2.82 per share, last year. Both rising food prices, such as beef and dairies, and higher marketing costs increased the overall costs of the company.

Strengths

Chipotle has some key strengths which keep attracting customers to its restaurants. Firstly, it is menu innovation. The company keeps bringing in new products and adding it to its list of offerings. This attracts consumers and keeps them hooked.

Also, it offers good quality food which is free from any kinds of antibiotics. In fact, it is popular primarily because it serves organic produce and meats. The chain buys antibiotic-free beef from Australia. Therefore, consumers have more reasons to visit its stores.

Further, the company is looking to expand 2 new types of units, called ShopHouse and Pizzeria Locale, which will compete with Yum! Brands’ Pizza Hut. Also, Chipotle plans to roll out its catering services which should help in the company’s growth.

Moreover, the restaurant chain operator plans to open new stores during the fiscal 2014. It expects to add a total of 180 to 195 new stores during the year, which again highlights the growth opportunity in this company.

The bottom line

The food company is on the right track as it provides the perfect mix of new products and the best quality possible. Its continuous improvement in its menu and striking a balance between rising costs and increase in volumes is commendable. Also, it provided a bright outlook to look forward to during the year. Further, with 44% share price increase in one year and 11% since the beginning of 2014, Chipotle is providing great returns to its investors. Therefore, if the food industry is what you are looking for, look nothing beyond Chipotle Mexican Grill.


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