Chipotle Mexican Grill (NYSE:CMG) is a restaurant chain which serves Mexican cuisine and epitomizes the concept of a fast-casual restaurant i.e. positioned higher than a fast food restaurant but below a casual restaurant chain such as Chili’s or Ruby Tuesday’s. Chipotle emphasizes on using fresh and naturally raised ingredients and using cooking methodologies found usually in premium restaurants. All of its restaurants are company-operated which means none of them is franchised/licensed. Trefis expects the company’s revenue in 2012 to touch $2.7 billion, about 20% more than the 2011 revenues.
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The restaurant chain’s EBITDA margins are close to 25% and have historically risen consistently since the rate of revenue addition has outpaced the rate at which fixed costs (such as labor and occupancy costs) have increased. Food and other commodity costs have generally stayed in the range of 30%-33% of revenues.
Chipotle had 1,350 restaurants as of September 30, most of which are in the U.S. Only 10 of its restaurants are present in international locations (5 in Toronto, 4 in London and 1 in Paris). The company is adding 170 restaurants in 2012 and plans to add another 180 in 2013. Chipotle’s stock has plummeted more than 30% in the last six months due to slowing comparable sales growth. Historically, it posted same-store sales growth in the region of 9-10%. Growth rocketed to 11.4% in Q1 but declined to 8.0% in Q2 and further dropped to 4.8% in Q3.
Trends To Watch
(a) Same-Store Sales Growth
Due to increased competition from Taco Bell, which introduced a similar menu at a lower price and has a much broader footprint, Chipotle’s sales are being affected. Increased competition also limits the company’s ability to raise menu prices, something that again affects same-store sales growth.
Management will be conservative in increasing menu prices and will only do so in case its rivals implement them first or input costs rise more than expected. We wouldn’t be surprised if same-store sales decline further in Q4 in absence of price hikes and since they come on top of an already high base (same-store sales growth for Q4 2011 was 11.1%). We generally estimate same-store sales growth in the region of 4-5% over the long term since sustaining historical growth figures is not possible over a wider base of restaurants.
Trefis expects margins to stabilize going forward. Historically, we have witnessed an improvement in margins, but this was largely because of high same-store sales growth figures. But under the assumption that they will slow to 4-5% in the long run, margin expansion looks unlikely. They should continue to remain in a similar territory although there could be a few fluctuations during certain quarters due to unexpected changes in input costs.
(c) Restaurant Expansion
Chipotle is also experimenting its Asian-cuisine restaurant called ShopHouse Kitchen. Until now, the restaurant had a presence only at one location, but the company plans to add a couple more in the first half of 2013.
If the concept is successful, there is tremendous potential in terms of the number of restaurants that can be opened under this brand. But to assume the next wave of growth to come from this brand of restaurant would be too optimistic at the moment. 
Unless ShopHouse Kitchen can complement the new additions or Chipotle plans aggressive openings internationally, we expect the rate of restaurant addition to slow down. The expansion rate is also likely to slow down due to its relatively higher pricing compared to other fast food chains. Since the management hasn’t promulgated its intent to pursue any of the above right now, we are conservative in our forecasts for the number of restaurant additions.
We have a price estimate of $313 for Chipotle Mexican Grill, which is about 15% higher than the current market price.Notes: