Chipotle (CMG, Financial) is one of the biggest names in the quick-service-restaurants business. The company has gone through its fair share of ups and downs with an earlier health scare and competition from Taco Bell but has emerged strongly with a three-year annualized revenue growth rate of 14.6%.
A common perception in the market is that Chipotle is one of the pricier restaurant company stocks (probably because of its high price-earnings ratio), but that might not necessarily be the case. In its results last week, the management provided some interesting insights on the company’s digital strategy and its future, which made the stock a very interesting pick for a more detailed analysis.
Strong results in growth and comparable sales
Chipotle delivered its sixth consecutive outperforming result for its previous quarter, beating analyst estimates with respect to its revenues as well as earnings. The company reported a top-line of $1.44 billion for the quarter, beating the analyst consensus estimate of $1.4 billion with a strong 13.4% growth in comparable sales and an 8% increase in comparable restaurant transactions.
One of the biggest contributors to the top-line was the digital sales, which grew by a jaw-dropping 78.3% and accounted for 19.6% of the total sales. The company’s reported earnings of $2.86 per share were well above the analyst expectation of $2.75, which was largely a result of a 19.2% margin at the restaurant level. The management expects the restaurant sales to continue growing at a mid-single-digit rate, and they plan to open another 150-165 restaurants in 2020, which should provide a significant boost to the top-line.
Chipotle’s digital strategy
One of the biggest drivers of the company’s top-line growth is its strong digital strategy. Chipotle’s mobile application is among the 20 most popular apps on the app store and is well ahead of its main competitor, Taco Bell. The reason for this is its sheet simplicity and the convenience attached to it. The Chipotle app allows users to select their preferred meal form, ingredients, the expected time for pickup or delivery followed by the mode of payment. The time-saving nature of ordering is the reason why it is preferred by working professionals and students alike.
Additionally, they are able to tie in customers through a strong loyalty program. Chipotle’s program is such that $1 spent results in 10 points, and by spending $125, customers can get free entrees at a price ranging from $8 to $10. The whole concept of the loyalty program is making customers spend more owing to the pure psychology of getting freebies in the future. This, coupled with the fact that Chipotle is considered as a premium quick-service-restaurant chain, is the main reason why the company has a much higher revenue-per-restaurant as compared to McDonald’s (MCD, Financial) or its other peers. Admittedly, its prices are higher than McDonald’s and the others, but the fact is that Chipotle’s presence is largely in urban areas with a high median income level and a high level of expenditure on the average meal, which is why it continues to click.
The health scare days are over
Back in 2015, there was a major health scare associated with Chipotle after some cases of food-borne illnesses, which prompted the company to increase direct costs for putting up additional food safety measures in its restaurants. This resulted in a lower margin, but the company has recovered since those days.
Also, the management has been experimenting wonderfully on the offerings in its menu in an attempt to match up to the latest trends. Some good examples of the company’s menu experiments include its range of lifestyle-focused bowls such as the low-carb Keto bowl, the Whole30 bowl and the Paleo bowl, which are focused on healthy consumption. All these are a wonderful attempt by the company to show how it is among the most health-focused quick-service-restaurant chains.
Not valued as high as peers
The above chart focuses on the enterprise-value-to-revenue multiples of Chipotle and two of its closest quick-service-restaurant peers, McDonald’s and Yum! Brands (YUM, Financial). The chart speaks for itself, as one can clearly see that Chipotle is valued significantly below the levels of McDonald’s and Yum! Brands in terms of the revenue multiple, and the fact is that Chipotle has much more room for expansion as compared to both these players.
Ironically, Chipotle’s revenues per outlet are also above both these brands and also above Wendy’s (WEN, Financial), which is trading at a revenue multiple slightly above Chipotle. Clearly, there is immense scope for multiples expansion given Chipotle’s growth potential and its strong digital sales performance, which means that the stock price could break its 52-week high levels very soon.
Key takeaways
Chipotle CEO Brian Niccol and his team deserve credit where it is due. They have revived the company’s brand wonderfully after a period of panic among investors and customers alike. The company is rapidly growing its number of outlets to boost the top-line and has scope for multiples expansion as well given the valuations of its peers, which means that it could easily deliver another year with over 40% appreciation like the past 12 months. The stock is an interesting long-term investment opportunity for growth investors looking within the quick-service restaurants space.
Disclosure: No positions.
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