Chipotle is still doing everything right

Author: Jonathan Wee

Covestor model: Macroeconomic and Secular Trends

Disclosure: Long CMG

Have you ever been to Chipotle Mexican Grill (CMG)? It’s quite the experience for an upscale Mexican fast food restaurant, and the sheer feeling I get when I go to one of their locations makes me believe it has good future growth prospects.

Let’s compare Chipotle to the king of fast food, McDonald’s (MCD). The atmosphere at McDonald’s can vary greatly. Some stores have nice decor, bathrooms, and music whereas other locations encourage take out. All kinds of people eat at McDonald’s, from infants to the elderly. They enjoy the diversity of food offered such as beef, chicken, fish, snacks, salads, and drinks. Patrons have easy access to food throughout the day thanks to locations being virtually everywhere, serving breakfast, lunch, and dinner. The food tastes good and can be fairly economical if picked from the dollar menu. However, most of the food is pre-made and not fresh. I know that eating Big Macs and fries are bad for the body and I feel guilty when I eat at McDonald’s. Often, I try to make mental notes to choose healthier places to eat next time. Usually I go to McDonald’s for convenience while on the road or if I’m in an unfamiliar place, because I always know what to expect from their food. I don’t really seek out a McDonald’s, I stumble upon one.

Chipotle, on the other hand, is a place I often desire to go to. The atmosphere is fairly consistent, with a modern look and feel. The customers are usually middle-aged or young professionals who want to eat at a chic and hip restaurant. They enjoy Chipotle’s delicious Mexican cuisine and know that it has integrity. Chipotle is committed to using sustainably raised food that supports the environment and local farmers. The food is also fresh. While standing in line, I can usually see someone cooking steak or making guacamole in the back. Eating here makes me feel good about my decision to seek a healthier world, a healthier community, and a healthier me.

However, all this does not come without a cost. Even the most basic burrito is more expensive than a $5 footlong sandwich at Subway that is loaded with veggies. Chipotle isn’t as widespread as McDonald’s, and I have to pass many other tempting eateries on my way to one. Finally, a Mexican restaurant offers a very specific type of cuisine. If I’m not in the mood for burritos or tacos, I won’t feel like making the voyage to my local Chipotle.

The competition has taken notice, and now Taco Bell (YUM) has introduced upscale menu items to compete in this space. Higher food prices and macroeconomic headwinds have hit Chipotle hard recently. Diversity is needed for rough times, but instead of adding to the menu, Chipotle decided to open another chain called Shophouse Southeast Asian Kitchen. Its second location is set to open later this year in Washington D.C. and I think the reception will be good.

Imagine a group of restaurants with different cuisines that make you feel great to eat there because it is good for your health and supports the local economy. Whether you’re up for Mexican or Asian food, the Chipotle chain of restaurants could fit your mood.

Although Chipotle’s growth slowed this past quarter, which knocked down its stock price considerably, it’s still doing well compared to other healthy casual fast food restaurants, like Panera Bread (PNRA). For the second quarter, Panera had a total of 1,591 locations and reported revenue of $530.6 million which is 18% higher than the previous year. Net income totaled $44.1 million, or a 24% increase. Diluted earnings per share came in 27% higher at $1.50. Finally, comparable restaurant sales increased 7.1%. These results are decent for a growing restaurant chain.

Now, let’s look at McDonald’s with its 33,510 restaurants (year-end 2011). In the second quarter, McDonald’s brought in $6.9 billion in revenues, a 5% increase from 2011 in constant currencies. Net income increased 1% to $1.3 billion. Diluted earnings per share increased 3% to $1.32. Comparable restaurant sales rose 3.7%. McDonald’s results represent the mature fast food chain with its slow but steady growth and resilient business.

Finally, compare those results with Chipotle. In the second quarter, Chipotle ran 1,316 total restaurant locations. Revenue came in at $690.9 million, a 20.9% increase from the previous year. Net income increased 61.2% to $81.7 million. Diluted earnings per share were $2.56, an increase of 61%. Comparable restaurant sales increased 8%, showing that growth at Chipotle continues to be strong compared to other growing chains, despite many shared challenges.

Any investments discussed in this article are for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments are presented for discussion purposes only and are not a reliable indicator of the performance or investment profile of any composite or client account. Further, the reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.

Author profile

Jonathan Wee
Jonathan Wee
I’m a growth investor with a long-term view on macroeconomic trends. As a systems engineer, I use processes and tools that reduce the risk in complex projects to create better products for customers. I bring this same approach to my investments. Poor or risky decisions make investing a nightmare. That is why I want to increase the transparency so lacking in typical mutual funds with regard to research, watch lists, trade decisions and portfolio performance. By publishing these findings, we can improve our investment strategies together.