Are you salivating over the chance to jump in on the 2006 initial public offering of Chipotle Mexican Grill by 92% owner McDonald's (NYSE: MCD)? If so, the initial prospectus is available for your perusal.
The good news: There's a lot to like. The company owns almost all of its 454 stores (in 21 states plus D.C.), and there is tremendous potential for expansion, considering that, for example, New York and Florida combined have just 20 Chipotle restaurants.
Sales are strong. The average trailing-12-month sales per store came in close to $1.4 million for the period ended June 30, 2005, up from roughly $1.05 million in 2002.
For the first six months of 2005, revenue increased 32.5% over the comparable year-ago period, and net income soared 410.8% as the company started to build critical mass. Operating margins, at 4.8%, are below the industry annual average of 6.4% and well below the 11.1% at parent McDonald's.
But consider this: The first six months include the slowest sales period for the company -- wintertime. So, full-year margins should increase when stronger summer and fall numbers are included. As for margins, competitors do not own and operate all of their stores, like Chipotle does -- which reduces revenue, as McDonald's and others have some concentration in higher-margin franchise and royalty revenue.
Growth should continue at a rapid pace. The company plans to accelerate the number of stores it opens over the next three years. Margins could expand significantly if Chipotle can continue its unique style of business, since the growing company should be able to negotiate significant cost advantages on food, supplies, and other areas as it grows ever larger. Also to its merit, the company spent only 1% of total sales on advertising in 2004, but its quirky print and radio ads and its 15-second PBS spots are frequently the topic of office conversation. There are no coupons or "value meals," but the company believes that word of mouth, and free in-store sampling, is what attracts customers.
Investors interested in Chipotle's as a long-term holding need to consider the cost increases the company will experience if McDonald's voting or share ownership falls below certain pre-set levels. Supplier agreements, like that with Coca-Cola (NYSE: KO), would have to be renegotiated with Chipotle as a standalone business. Add in the administration of health benefit plans, 401(k)s, insurance policies, and those ugly Sarbanes-Oxley compliance costs, and the loss of Mother McDonald's would hurt short-term results.
Will some of 2005's leading IPOs be a harbinger of things to come for Chipotle? Prime steak and fine-dining establishment Ruth's Chris (Nasdaq: RUTH) and small upscale casual-dining company Kona Grill (Nasdaq: KONA) shared an IPO woe -- their stocks were selling for less than their IPO price six weeks after going public. And specialty-coffee purveyor Caribou Coffee (Nasdaq: CBOU), besides not being embraced as the next Starbucks (Nasdaq: SBUX), suffered an ugly first day of trading. After rising by $1.50 per share, the stock closed its first day of trading $1 below its IPO price.
It's too early to tell whether Chipotle will suffer a similar fate. Investors would be wise to remember that data from 1970 to 1990 shows that IPOs usually underperform during their first five years as public companies, and that the restaurant business is, indeed, brutally competitive.
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