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Chipotle May Be a Buy Now

July 25, 2014 | About:

Chipotle Mexican Grill Inc. (NYSE:CMG) operates Chipotle Mexican Grill restaurants. Chipotle Mexican Grill restaurants serve a menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads. The company operates around 1,700 outlets.

Chipotle has been in business for 20 years. The brand is not new to consumers.

Performance Recently

Chipotle's average same-store sales growth for the prior three years was 7.6%. Restaurant growth, meanwhile, clocked in at 14% from 2009 through 2011. In the last three years, that number's stayed right on par, at 14%.The Denver-based burrito maker said it earned $3.50 per share in the second quarter. Like many companies in the food industry, Chipotle has been paying higher prices for key ingredients. Specifically, prices for steak, cheese and avocados have all risen sharply this year due to bad weather in many parts of the country.

Revenue rose 28% to $1.05 billion, surpassing analysts' estimates, as higher prices boosted the top line. The price hikes also haven't taken a toll on store traffic. Same-store sales increased 17% in the second quarter. That was one of the strongest quarterly sales rates in Chipotle's history as a public company, according to CEO Steve Ells. Burritos have been a hit with investors too. While the stock took a tumble in April, it's still up more than 10% this year.

Food costs as a percentage of revenues increased 150 bps to 34.6% due to higher beef, avocado and cheese costs. However, labor costs as a percentage of revenues, contracted 90 bps to 21.8%.Chipotle ended the quarter with cash and cash equivalents of $470.1 million, up from $411.6 million in the previous quarter. Total shareholder equity was $1.75 billion, up from $1.65 billion in the previous quarter.

Growth Expected

By 2018, Chipotle's sales are slated to jump another 43 percent to more than $6.5 billion. Chipotle's annual sales are now expected to nearly eclipse $4 billion in 2014. That would mean 1,143 percent growth since 2003, and 377 percent growth since 2006, when the company went public. The company is expected to see annual U.S. sales balloon to$5.5 billion by 2016, from about $4.5 billion today.

In its second-quarter earnings report, the company said it expects to open between 180 and 195 restaurants in 2014. It’s already halfway to that goal, having opened 89 restaurants through end June. The company plans to open several more ShopHouse locations in the coming year, and at least one more Pizzeria Locale.

New Launch

While other fast-food chains might try to entice potential customers with images of satisfied-looking folks chomping on burgers, the Colorado-based chain tends to eschew traditional advertising methods. Chipotle has spent more than $1 million launching a satirical web series on Hulu called Farmed & Dangerous.

The satirical show is set up to poke fun at big agriculture and its unsavory practices. Though the first of the four-part series just launched on Monday, food experts are already jumping into the discussion about what it means for the industry. “The series is funny but also dead serious,” said Michael Pollan, author of "Cooked" and "The Omnivore’s Dilemma," in an exclusive interview. “It’s a stern challenge to the rest of the fast food industry, who would rather not have a public conversation about how the meat they’re serving is produced,” he said.

To End

Chipotle operates in the fast-casual segment of the restaurant industry, which is growing at a nice clip because consumers are responding favorably to food quality that is as good as that of full-service restaurants combined with the convenience of a quick-service operating model.

Chipotle has been expanding rapidly since it spun off from McDonald's in 2006. With $3.2 billion in sales last year, it ranks as the nation's biggest "fast-casual" Mexican food chain. Chipotle has plenty of room to continue expanding its store base in the U.S. before reaching any kind of saturation point, and international markets are still practically untapped.

Chipotle has become famous for promoting antibiotic-free meat and dairy products and working with highly regarded purveyors such as Niman Ranch. They post a list of suppliers on their web site and have also been known to display glossy color posters featuring individual farmers in their restaurants.

By buying ethically farmed meat, Chipotle actually helps the industry raise its standards. It becomes possible for quality farmers to sell their products at a better price, which enables more people to buy quality meat. It drives competition to follow suit. It makes antibiotics an issue. In principle, we all win. It is expected that the company will create good returns to its shareholders.

Competition remains fierce, but Chipotle has shown signs of a nascent economic moat. With a simple but uniquely customizable menu and aesthetically pleasing restaurant designs, the company has developed a brand that commands pricing power.

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