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Investment Overview for Chipotle (NYSE:CMG)
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 and stood at $11.6 in 2013. Trefis expects the Average Spend per Visit to increase moderately over the forecast period. In case, it increases to $15 by 2020, there could be an upside of 15% to the Trefis price estimate for Chipotle stock. 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 10% to Trefis price estimate to Chipotle's stock if the Average Spend per Visit only manages to rise to just $12 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 increased in 2006 and 2007 before declining in 2008 and 2009 due to the deteriorating economic environment and due to the fact that consumers had not reacted positively to Chipotle's price hikes on the menu in these tough times. However, since 2010, the number has risen steadily and stood at 185,000 in 2013. Trefis expects the trend to continue. Increasing brand awareness and customer loyalty as well as 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 240,000 by the end of forecast period, there could be an upside of approximately 10% to the Trefis price estimate for Chipotle's stock. If however it fails to rise beyond the current levels, there could be a 15% 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 December 31, 2013, the company operated 1,595 restaurants, most 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 SouthEast Asian Kitchen in Washington DC, its first experiment with Asian cuisine.
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 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 service 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, 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 $3.9 in 2013 whereas the corresponding figure in Chipotle was more than $11.6. The company has successfully marketed itself as a restaurant serving natural and organic food, 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 2013 were around 28% versus 80% 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 are located in well established markets and have high brand awareness. Since most of these restaurants are constructed in secondary trade areas with attractive demographics, the occupancy costs are low. These restaurants also enjoy lower investment costs. The average development costs for new restaurants has decreased from $916,000 in 2008 to $800,000 in 2011. In 2012, the figure was close to that of 2011. Lower investment costs have facilitated a higher rate of expansion. About 30% of the 2012 openings were "A Model" restaurants. In 2013, the average development cost was once again close to the 2012 level, but the figure could rise to $830,000 in 2014.
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. In early 2011, T.G.I. Friday’s launched a campaign stressing on a new, healthier and natural menu. Similarly, the McDonald's commercial launched in December 2011 boasted the use of quality ingredients in its supply chain. 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 490 in 2005 to 1595 in 2013. Chipotle also opened its first European restaurant in London in 2010. Since then, it has added another 15 restaurants outside the U.S.
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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