Three Reasons To Be Optimistic About Chipotle

by Trefis Team
-7.18%
Downside
676
Market
628
Trefis
CMG
Chipotle
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Chipotle Mexican Grill (NYSE:CMG) has had its share of ups and downs. After touching $440 in April last year when Q1 results blew past expectations, it bottomed at $235 after the disappointing third quarter results. Although the stock has recovered somewhat and is currently trading around $310, Trefis estimates there could be a further upside to the current market price.

Here are a few reasons why we are optimistic about the stock:

See full analysis for Chipotle Mexican Grill

1) Comparable Sales Should Improve

Chipotle’s same-store sales growth was a mind boggling 12.7% in the first quarter of 2012, but the growth rate has declined in each quarter since. Same-store sales stood at a modest 3.2% in the fourth quarter. Part of the reason why the sales slowed was because of very limited menu price increases. With the management having already announced its decision to raise prices sometime during the summer, the same-store sales should get a boost.

It will also help the margins since the cost of raw materials had started to creep higher. The cost of food, beverage and packaging accounted for 33.5% of the sales in the fourth quarter, up 1.3% over the previous year quarter. [1]


Chipotle is also experimenting with a new tofu based item called ‘Sofritas’ in seven of its restaurants in the San Francisco Bay Area. The unusually named item has created a lot of buzz and will eventually be extended to restaurants on a nationwide basis. New menu items often lead to a jump in the footfalls, which can lead to higher sales.

2)  New Revenue Streams

Chipotle has started offering catering services. Although it will only be offered at select restaurants initially, the service will be rolled out to other markets in the coming months. For Chipotle, the concept of catering isn’t bad if executed well.

All stores have to incur expenses like labor and occupancy costs, which remain more or less constant irrespective of the total sales. Catering is a pretty good way of generating incremental sales without requiring a substantial amount of capital expenditure. We estimate it could add more than $200 million to the top line if the concept gains traction.

3) Plenty of Scope to Expand

Chipotle had 1,410 restaurants in the U.S. as of December 31, 2012. The company added 181 new restaurants in 2012 and will open another 165-180 this year. Given the ubiquity of other restaurant chains (McDonald’s has more than 14,000 in the U.S., Dunkin’ has >7000 ), there is still a plenty of scope to expand within the U.S. before the chain faces saturation or the restaurants start cannibalizing each others’ sales.

Even if you argue that Chipotle’s number of outlets will never reach the scales of other fast food chains due to its higher pricing, there is still a significant upside to the current figure. One report by a Citibank analyst even suggests that Chipotle will eventually triple the number of restaurants in the U.S. [2]

International markets present a considerable opportunity for the restaurant to open new outlets. The company only has a combined total of 12 outlets in the U.K., Canada and France. Brand recognition outside the U.S. is low so the company is going about things slowly at the moment. It plans to open its first restaurant in Germany in 2013 as well. [1]

Chipotle will also be opening its second outlet of its Asian-cuisine venture called ShopHouse Kitchen in 2013. It’s fair to assume a few more of these could mushroom in the coming time once the company is satisfied with the initial test results and done with setting up supply chains.

We have a price estimate of $327 for Chipotle Mexican Grill, which is about 5% above the current market price.

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Notes:
  1. CMG 10-k [] []
  2. Chipotle to Triple U.S. Restaurants, Citigroup Says, February 22, 2013, thestreet.com []
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