Summary
- Chipotle’s operational performance has historically been attractive, and its fundamentals look healthy.
- Restaurant-level operating margin increased to 23.9% in 2022, the highest in the past five years.
- Its robust expansion plans as well as menu and brand innovation efforts should keep driving growth in the coming years.
Chipotle Mexican Grill ( CMG ) has shown very robust growth over the years. We covered the stock in June 2022 with a buy rating, as it had dipped to very attractive levels then. It is a solid company with attractive growth prospects, as we will discuss next. The only factor that isn’t as attractive as is the case with all top-growing companies, is its valuation. However, we believe that long-term investors who buy at current levels can expect market-beating returns.
Investment Rationale
Chipotle Mexican Grill is a non-dividend-paying stock in the fast-food chain industry. Chipotle’s operational performance has historically been attractive and its fundamentals look healthy. Its huge expansion plans and focus on digital growth should fuel the company's growth. New restaurants with higher volumes and strategic menu price increases will play a key role in uplifting the company's performance. Its stock is trading at a discount to its 52-week high price and looks reasonably valued. This makes the CMG stock a suitable investment opportunity for the long term.
About the Company
Chipotle Mexican Grill is a fast-casual chain restaurant that owns and operates Chipotle Mexican Grill restaurants. At the end of 2022, CMG had a total restaurant count of 3,187. Of these, 571 were Chipotlanes. Chipotlanes are drive-thrus, where customers can place their order through the Chipotle mobile app or website and pick up the order at Chipotlane without waiting and leaving their car.
Strong Operational Growth
CMG has exhibited a robust operational performance over the last five years with average revenue growth of 34%, operational profit growth of 91%, and an exceptional average net income growth of 175%. Despite the challenging macro environment, the company was able to deliver a resilient performance in 2022 with the expansion of its average unit volumes and restaurant-level margin.
In 2022, the operational performance remained strong despite opening 236 new restaurants of which 202 were Chipotlanes, indicating that new locations are not hurting the performance of current locations. The revenue growth was driven by new restaurants as well as an 8% growth in comparable restaurant sales. Restaurant-level operating margin increased to 23.9%, the highest in the past five years.
CMG's operational margins are trending higher since 2019 showing the company's improving performance.
CMG’s EPS grew 29% to $32.04 in 2022 as compared to $22.9 in 2021. Since 2019, the number has zoomed attractively.
In Q42022, CMG faced some challenges unique to the quarter but was able to report a resilient performance . Despite the peak food inflation trend which affected the comparable restaurant sales on a YoY basis, the company was able to execute multiple price increases which showed a relative inelasticity to the customer demand for its products. This gets reflected in an 11% YoY rise in revenue underpinned by 5.6% comparable restaurant sales, a 380 bps rise in restaurant level margins, and a 49% YoY rise in diluted EPS number. During the quarter, CMG opened 100 new restaurants with 90 including Chipotlanes.
Strong Balance Sheet
Chipotle Mexican Grill’s fundamentals are strong, with a debt-free balance sheet and healthy current ratio and quick ratios above one which shows comfortable coverage of short-term liabilities.
Cash from operations and free cash flow grew at a robust pace over the last five years. The net cash and cash equivalents declined in 2022 as compared to 2021 due to a higher amount of share repurchases.
The Return on Equity and Return on Capital Employed generated by CMG is attractive with an average ROE of 24.6% and an average ROCE of 15.02% in the past five years.
Growth Catalysts
Focus on innovation
Chipotle Mexican Grill maintains its constant focus on the menu and brand innovation. The company offers its customers a loyalty program called Chipotle Rewards, where points are earned for every dollar spent and can be redeemed through multiple options. In 2022, the number of members availing of the Chipotle Rewards grew 20% to 31.6 million. CMG is constantly making efforts to upgrade its program to better serve its customers and underpin transaction growth. It has also launched Freepotle, which offers members 10 personalized free rewards throughout the year.
On the menu innovation front, the company has recently launched a new Lifestyle Bowl menu catering to the needs of GenZ and Millennial wellness trends. With these new lifestyle bowls, the company intends to attract more customers by offering them healthy and balanced meals made with existing ingredients and great taste. Menu innovation also included a reduction in any menu deactivations to retain more customers.
Increasing Digital Footprint
CMG's intense focus on constant digital evolution differentiates it from its competitors. Its digital business makes up 39% of its sales. Around 85% of the company's restaurant portfolio has Chipotlanes and they are expected to grow as customers find it convenient. The company has a Real Food for Real Athletes platform which focuses on helping athletes across all levels perform by providing proper nutrition through real food and real ingredients. The company has also recently adopted some different automation and technology practices which will help increase work efficiency, enhance employee and customer experience as well as support in fulfillment of its digital goals.
Another important factor in enhancing the digital footprint is effective labor management. The turnover levels for the company have declined, which gives it the confidence of having stable teams in higher volume months. With this, the company aims to boost the throughput numbers to the pre-pandemic levels.
Optimistic Growth and Demand Outlook
CMG's growth path has been sturdy. In 2022, the company opened the highest number of restaurants compared to that opened in the past six years. The company's targeted expansion rate is 8% to 10%, which supports its growth outlook. In 2023, CMG plans to open 255 to 285 new restaurants, at least 80% of which will include Chipotlanes. The company has seen healthy traffic in January 2023 which enhanced the transaction trends and led to comparable restaurant sales in low double digits. Assuming the positive momentum continues, CMG expects comparable restaurant sales to be in higher double digits by the end of Q12023. The company has recently announced the launch of a new California-inspired fresh eatery concept, Farmesa. In this concept, CMG will be focusing more on menu development and has outsourced the kitchen operations to a virtual kitchen company named Kitchen United Mix. This will help CMG reach more customers and develop its concept.
On the international expansion front, CMG is gradually growing in Canada while dealing with higher inflation pressure in Europe. It is getting positive feedback in terms of demand for its burritos and bowls, culinary, convenience, and speed. CMG looks forward to the higher volume business from March to May which it calls “burrito season” and has announced that it will hire 15,000 workers to manage the preparations during the high-volume season.
Attractive Valuation of CMG stock
When compared to the stocks of its peer companies Texas Roadhouse ( TXRH ), Restaurant Brands International ( QSR ), and Yum! Brands ( YUM ), CMG stock appears to be expensive based on the PE ratio. The company's strengths in areas like handsome revenue and profit growth, constant EPS growth, and attractive returns on equity justify its premium valuation over the stocks of its peer companies. This higher earnings growth gets reflected in its PEG ratio, which is comparable to that of its peers.
Conclusion
Chipotle Mexican Grill recorded a resilient performance in 2022 with impressive operational growth and margin numbers which include attractive restaurant margins and comparable restaurant sales. An absence of debt makes the company more attractive and gives it a healthy liquidity position. Its robust expansion plans, menu, and brand innovation, along with a focus on increased throughput while dealing with higher food inflation, are its major growth drivers. The company’s constant focus on digital advancement provides a tailwind for its operational performance. CMG stock is trading at a reasonable valuation and at roughly a 15% discount to its 52-week high price. These factors make it an attractive long-term investment.
For further details see:
Chipotle Mexican Grill's Recipe For Success Has Several Ingredients