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Investment Overview for Chipotle (NYSE:CMG)
WHAT HAS CHANGED?
Chipotle Mexican Grill substituted one of its pork suppliers
In January, Chipotle Mexican Grill suspended one of its pork suppliers in the U.S. after an audit, on claims of below standard animal welfare protocols. This affected the supply of Carnitas to about one-third of the company’s outlets. However, the decision of the company to not shift to pork from conventionally raised pigs went down well among the customers. Chipotle uses meat that comes from animals raised in natural environments and without the use of antibiotics.
However, the company managed to counter the shortage with the addition of a new pork supplier, Karro Food Group of the U.K., which has already started serving pork to the company’s restaurants in Florida. This has certainly brought some relief to the company, which was struggling with a shortage of pork to be used in its Carnitas.
Below are key drivers of Chipotle's value that present opportunities for upside or downside to the current Trefis price estimate for Chipotle:
Company Operated Restaurants
- Average Spend per Visit : The Average Spend per Visit, historically, has been continuously increasing at a steady pace driven by increases in the menu prices. In 2009, it increased at a slow pace compared to 2008 due to the deteriorating economic conditions. However, the figure continued to grow steadily and stood at $11.60 in 2013. The average check improved significantly in 2014 to $13, due to an increase in menu prices. Trefis expects the Average Spend per Visit to increase moderately over the forecast period. The commodity prices are on the rise, and in case the average check crosses $17.8 by 2022, there could be an upside of 11.5% to the Trefis price estimate for Chipotle stock. However, due to intense competition, Chipotle could consider decreasing prices in the future and this would consequently affect the Average Spend per Visit. There could be a downside of 12.5% to the Trefis price estimate for Chipotle's stock if the Average Spend per Visit manages to rise to just $14 by the end of the Trefis forecast period.
- Average Number of Visits per Restaurant per Year: The Average Number of Visits per Restaurant per Year witnessed a decline in 2008 and 2009 due to the deteriorating economic environment, and due to the fact that consumers had not reacted positively to Chipotle's menu price hikes in these tough times. However, since 2010, the number has risen steadily and stood at nearly 186,000 in 2014. Trefis expects the trend to continue. Increasing brand awareness and customer loyalty, increasing popularity of the fast casual segment, as well as a focus on increasing service time (some Chipotle restaurants are able to service 300 customers per hour) are the key drivers that could affect Average Number of Visits per Restaurant per Year. In case this figure increases to 263,000 by the end of the forecast period, there could be an upside of approximately 14% to the Trefis price estimate for Chipotle's stock. If, however, it fails to rise beyond the current levels and stays at 201,000, there could be a 13% downside to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Chipotle at the top of the page.
Chipotle Mexican Grill is a chain of restaurants operating in the casual dining segment, which specializes in serving Mexican cuisine. As of June 30, 2015, the company operated 1,878 restaurants, almost all of which are located within the U.S. All the restaurants are company-operated with no franchises. In October 2011, the company opened a restaurant named ShopHouse South-East Asian Kitchen in Washington DC, its first experiment with Asian cuisine. The company operates 10 net ShopHouse restaurants as of June 2015. Moreover, in 2013, the company also invested in an entity that owns and operates the brand "Pizzeria Locale," a fast casual pizza brand. Chipotle Mexican Grill expects to open around 190 to 205 more restaurants in 2015, including a small number of ShopHouse and/or Pizzeria Locale restaurants.
Chipotle's menu comprises a Mexican fare with a few things that can be mixed and matched with various sauces and ingredients such as salsa, guacamole, cheese, and lettuce, to make up one's own dishes. The menu essentially consists of Tacos, Burritos, Salads, and Burrito Bowls (Burrito without the Tortilla).
Chipotle operates on the "Food with Integrity" principle, wherein it offers naturally raised pork, chicken, and beef. Naturally raised implies that the animals are raised in open pastures and are fed on a pure vegetarian diet, without any added hormones or antibiotics.
Chipotle's objective is to give a fine dining experience in quick time and provide quality food and ambiance without having the customer wait too long. Some Chipotle restaurants can serve up to 300 customers an hour.
Chipotle competes with restaurants in the casual dining segment such as Applebee's, Qdoba, Taco Bells, Chili's, among others. It also competes with fast food restaurants such as McDonald's, Burger King, Subway, and KFC.
Chipotle's business is fully dependent on company-operated restaurants which explains the significance of this division to its stock.
Higher average spend per customer than competitors
Chipotle enjoys higher average spend per customer than most of its competitors. For example, in McDonald's, the average spend per customer was around $3.80 in 2014, whereas the corresponding figure in Chipotle was around $13. The company has successfully marketed itself as a restaurant serving natural, hygienic, and organic food in an upscaled ambiance, for which the consumers are often ready to pay a slight premium.
Another reason why the company enjoys a higher average spend per customer is because it has restaurants only in developed countries, where the average spend is usually higher than developing countries. Most of the fast food restaurant chains have a mix of restaurants in developed and developing countries, which has a lowering effect on the overall spend per customer.
Company operated restaurants generate lower profit margins than franchised restaurants
Company-operated restaurants are low margin businesses in comparison to franchises. Chipotle's EBITDA margins for 2014 were around 25% versus 90% for McDonald's franchised restaurants. Since all of Chipotle's restaurants are company operated, its overall margins are also lower. While in McDonald's case, the high franchised restaurant margins compensates for its lower margins from company-operated restaurants.
"A Model" restaurants have lower investment costs
"A Model" restaurants, which are smaller concept restaurants, are constructed in secondary trade areas with attractive demographics, and hence the occupancy costs are low. Also, most of the Chipotle's restaurants are located in well established markets and have high brand awareness. These restaurants also enjoy lower investment costs. The average development costs for new restaurants has decreased from $916,000 in 2008 to $800,300 in 2013. However, it increased to $843,000 in 2014. Lower investment costs have facilitated a higher rate of expansion. However, the figure could rise 5-6% in 2015.
Organic and healthier food gaining importance in the U.S.
Consumers have become more health conscious and there is an increase in demand for natural and healthier food. Using its 'Food with Integrity' campaign, Chipotle has aggressively marketed itself as a restaurant using only naturally raised meat. Taking cues from Chipotle, an increasing number of restaurant chains are adding all-natural products to their menu. Wendy's started offering upscaled items on its menu last year. Moreover, its restaurant remodeling initiative is inspired by Chipotle. Similarly, McDonald's commercial campaign launched in December 2011 boasted the use of quality ingredients in its supply chain. The company is also renovating its kitchen by equipping all stores in the U.S. with high quality kitchen preparation tables, allowing faster preparation. Furthermore, McDonald's can be expected to offer more hygienic ingredients such as fresh fruits and vegetables, sustainable fish, and cage-free eggs in order to drive customer traffic. An increasing number of restaurants now tout the quality and the freshness of their ingredients in order to portray a healthy image of themselves.
Growth in number of stores and expansion into European markets
The company has seen significant growth in its number of stores which has increased from around 956 in 2009 to 1,783 in 2014. Currently it operates 1,878 stores, as of June 30, 2015. Chipotle also opened its first European restaurant in London in 2010. Since then, it has added another 19 restaurants outside the U.S. in highly developed markets such as Canada, Germany, France, and the United Kingdom. There are a lot of growth opportunities for the company in international markets, especially in high GDP countries.
Trefis Forecast Rationale for Restaurants EBITDA Margin
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses, such as Cost of Goods and Services Sold, SG&A Expenses, and R&D Expenses. EBITDA Margin represents divisional EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-cash charges, such as stock-based compensation expenses.
Chipotle incurs the following costs for its operations:
- Food, Beverage and Packaging Costs
- Labor Costs
- Occupancy Costs
- General and Administrative Costs
- Other Operating Costs
- Pre-Opening Costs
From 2008 to 2010, EBITDA margins witnessed steady growth from 19.0% to 23.8% mainly due to impressive restaurant sales growth which outpaced fixed costs such as labor and occupancy costs. The sum of labor and occupancy costs, as a percentage of revenues, declined from 33.7% in 2008 to 31.7% in 2010. In addition, commodity prices plummeted due to the recession which helped reduce food and packaging costs for the company. This had an upward effect on margins.
In 2011 however, the cost of food, beverage and packaging (as a percentage of revenues) rose significantly. Thus margins were impacted slightly from the previous year. Going forward, we expect the margins to rise gradually since the positive impact of economies of scale will be partially offset by high commodity prices.
Trefis considered the following factor in its forecasts:
Back to Company Overview
- Company to benefit from increasing comparable restaurant sales
- For 2011, Chipotle's comparable restaurant sales grew an impressive 11.2%, higher than most other restaurant chains. For the same restaurant, labor and occupancy costs remain more or less constant since they are fixed. Thus, the percentage of fixed costs, as a percentage of revenue, are witnessing a decline which has the tendency to push up margins.
- Increasing commodity prices
- In 2011, the cost of food, beverage and packaging rose significantly due to high commodity prices. In 2011, the figure stood at 32.5% whereas in 2010 it was 30.6%.
- The company expects the cost of raw materials to increase 5% in 2012. Any positive gains made due to lower fixed costs will be negatively offset by higher cost of raw materials.
- Chipotle cannot afford to increase prices significantly
- With the company's menu prices already higher than those of most other restaurant chains, it has no option but to absorb the increasing costs which will again put a downward pressure on the margins.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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