- Chipotle's current woes are not a sign of permanent damage.
- Recovery will come, albeit slowly.
- An ideal long-term investment if you can wait it out.
Chipotle Mexican Grill INc. (NYSE:CMG) is one of the companies you can depend on. They showed the restaurant world what profitability and growth are all about, and for more than a decade now they’ve continued to outperform themselves year over year over year.
Source: Company Filings
Today the company isn’t doing too well, but that’s only on the surface. The dreaded E. Coli has struck, and they’re down. But they’re not out by any means, and I’ll tell you why.
Chipotle’s Claim to Fame
For starters, it was possibly one of the few restaurant chains that grew more than five-fold in one decade. From sales of a little over $800 million ten years ago, they grew those revenues to more $4.5 billion last year.
But the real appeal to Chipotle’s loyal clientele is how they positioned themselves as a health-and-socially-conscious business. This was the company that really showed people that the burger giants were treating their restaurants like assembly lines, without much care towards how that food was sourced.
With Chipotle, people immediately knew they were getting top grade ingredients that were ethically sourced. To top that off, they elevated the humble burrito to superstar status - and the fashion-conscious consumer came. In droves.
And it’s because of that focus on “Food with Integrity” that the E.Coli episode has hit them hard, and Chipotle is doing everything it can to assure people that their food is still as safe and ethical as ever.
“We decided long ago that we didn't want Chipotle's success to be tied to the exploitation of animals, farmers, or the environment, but the engagement of our customers.”
— Steve Ells
A Beleaguered Burrito
For most people, a stock that drops from $750 to under $400 is something to stay away from. In CMG’s case, I think it’s just a matter of market panic in a sensitive area like food. Fortunately, the company agrees with me, or else they wouldn’t have opened 58 new outlets in the first quarter of this year alone.
And that brings us to one of two biggest reasons why Chipotle has been growing stronger over the years until the outbreak: store count.
Chipotle’s continued expansion drive is critical to its future, now more than ever. Since 2010, they’ve consistently grown the most important metrics. 2015 was an anomaly, as 2016 is likely to be. But I believe that with fiscal 2016 numbers will come an indication that the company is on its way to the pink of health.
For now, however, we may still be looking at a few quarters of loss while they regroup their efforts and get the numbers back in shape.
Some Success Indicators
One of the biggest indicators of whether or not a company can regain its former glory is its historicals. Chipotle is one of those companies that finds it hard to do anything wrong, until now. Every metric worth tracking has been shipshape and growing at a healthy clip. Here are a few that will show why I think it’s only a matter of time before Chipotle bounces back.
Average Restaurant Sales
Also known as Average Unit Volume (AUV), Average Revenue per Restaurant and other names, average sales tell you a lot about whether a company is growing at the right pace. A steady AUV with strong store growth (the next metric we’ll assess) is a good combination because it shows that every new restaurant is able to bring in as much as the others in its first year of operation.
Net Store Growth
The next important metric is the net growth in store count. It tells you what markets the company is actively looking at, what their next moves could be, what their Capex will look like (if they’re not franchise-heavy) over the next couple of years, and several other bits of useful investment clues.
Chipotle has been very consistent with this metric, nearly doubling their footprint in five years from 1,084 to 2,010 outlets between 2010 and 2015.
Comp Store Sales
Comparative store sales is another crucial health metric for a restaurant chain. There’s no point in adding more stores if you can’t keep maximizing or optimizing your returns from existing stores. And that gives investors a wealth of information about the management, the company’s operational efficiency, their marketing efforts and the value behind the brand.
As far as comps are concerned, Chipotle has been maintaining a high single-digit comps growth figure since 2010. That’s something every restaurant covets because, aside from price increases, this metric is completely dependent on growing customer traffic and average check size.
The Investment Case: Chipotle’s Future
There is no doubt in my mind that CMG will once again head towards the $750 zone and possibly go well beyond. Looking at today’s picture in isolation, one might not think that’s possible. Losing nearly half your market value in a year doesn’t bode well for any company.
But Chipotle has the consistent “performance ethic” that will help dig the company out of the hole they’re in. They’ve performed admirably on the three most crucial metrics for any restaurant chain because of the DNA that was instilled by Co-CEO and company founder Steve Ells.
For at least as long as Ells remains at the helm, and most likely well beyond that point, this is a restaurant chain that will survive and prosper simply because their priorities sync up well with the future of the food service industry.
The general public is far more aware today than ever about the hazards of poorly monitored food sourcing and the availability of healthier, more ethical alternatives. That’s where Chipotle’s real strength is, other than the fact that they can make a mean Burrito.
From an investor’s perspective, this is absolutely the best time to get in on CMG stock. But you’ll have to stay the course for a number of fiscals before you’ll see returns. I think you will, and that’s why I would rate this company a BUY in a heartbeat.