Carnitas Coming Back to Restaurants – Does This Really Impact Chipotle’s Valuation?
Chipotle Mexican Grill (NYSE:CMG) announced that its pork shortage is almost over and Carnitas will be back on the menu in most of its restaurants by November. This development might have a positive impact on the same store sales and further expansion plans, but may not have an immediate significant impact on the stock price. Earlier this year, Chipotle terminated one of its major pork suppliers due to an animal welfare standards violation. Chipotle stuck to its “Food with Integrity” promise and decided against serving conventional pork. This led to the withdrawal of Chipotle’s popular “Carnitas” from the menu of nearly one-third of its restaurants.
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With Carnitas back on the menu, existing store sales might see higher growth
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Sales at Chipotle’s existing stores grew by 4% in the second quarter of 2015, significantly down from 17.3% in the same period last year. This can be partly attributed to the fact that the menu did not include Carnitas in some restaurants, impacting repeat customers. With the shortage now resolved, the company might see more repeat business and higher growth in comparable store sales. Average spend per visit is an important value driver for Chipotle.
Does addressing pork supply shortage ensure that aggressive growth plans are on target?
Chipotle hopes to add 195-200 restaurants every year. Pork supply was definitely a concern for this growth, since one-third of its restaurants were impacted by the pork shortage. With the new supplier, this concern seems to have been addressed and this will definitely be accretive in the company’s expansion plans. We estimate Chipotle to have 3,200 restaurants at the end of our forecast period. This is one of the biggest drivers for Chipotle’s valuation.
Markets may have already priced in re-entry of carnitas in the menu
Chipotle gained a lot of moral ground by discontinuing its errant pork supplier. While pork shortage was an issue, tying up with Karro Foods in the UK assured the market that the company is addressing this issue. Though initially the supplier was not able to meet the entire pork requirements, the market seems to have been assured of a restoration in supply soon. The stock price did not change materially even after Chipotle announced that the pork shortage has been resolved. After the company declared its second quarter results for 2015, the stock jumped 8%, despite slow growth in the existing stores. (Read Stock Touches All-Time High, As Chipotle Fills In The Gaps). This indicates that the market is giving the company a lot of credit for its unique food culture and expected the pork shortage to end soon. We think that the market also believed that despite the pork issue, Chipotle will be able to achieve its restaurant expansion target.
The third quarter of 2015 will shed more light on the impact of supply restoration on the growth of the business, especially in terms of sales in existing stores.
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