Chipotle's Secret Weapons

If you're reading this, you probably already know that investors have been dumping Chipotle (NYSE: CMG  ) shares in the trash over the past two weeks like they're spoiled meat. Second-quarter revenue came in below expectations, and the market responded by sending the stock down 22% in one day. Since then, shareholders have continued to run for the door as the stock dropped another 11%, all the way down to $280, before recovering slightly.

What was once the golden boy of restaurant stocks is now being pelted with tomatoes. "The growth story is over," the critcs cry. "We'll never fall for this one again."

Chipotle bulls, on the other hand, argue that the restaurant is still in its infancy compared with behemoths such as McDonald's (NYSE: MCD  ) and Starbucks (Nasdaq: SBUX  ) , and it has two potent up-and-coming revenue streams in its international expansion and the ShopHouse Southeast Asian Kitchen franchise. While I believe that both ShopHouse and its new locations abroad are credible and lucrative opportunities, there's a whole realm of possibilities the market seems to be completely ignoring.

Learn the rules, then break some
If Chipotle was "priced for perfection," as they say, there's a good reason for it. It was perfect. The chain's concept, with a simple menu, minimalist decor, and cafeteria-style assembly, was a huge success, gaining devotees nationwide and a number of imitators in the industry. Fans regularly put up with long lines just to wrap their hands around one of its meaty burritos.

The stock was no slouch, either. Six years after its IPO, it was worth about 20 times what initial investors paid. This is a restaurant stock, by the way, not a tech company or a pharmaceutical. Wall Street's not supposed to let that happen.

With the stock riding a virtual flying carpet, the people in management haven't been forced to take any risks. They've simply copied the same formula that worked so well when they hung their first shingle in Denver back in 1993.

We'll need more than a quarter to determine whether the burrito chain is truly facing a sustained slowdown in sales growth, but if it is, it just means the company is dealing with some adolescent growing pains, not a complete self-destruction. I'm willing to bet that Founder Steve Ells and company have more than a few weapons waiting in the walk-in cooler if sales start to lag. Let's take a look at some of them.

The most important meal of the day
On nearly every earnings call, you can practically hear the Wall Street analysts salivating as they ask about the possibilities of a breakfast menu. Management has played coy thus far, and it surprisingly pulled the breakfast menu recently at its Dulles Airport location, the only one that offered it, saying that customers often asked for the lunch menu and that they couldn't offer both simultaneously.

But a look at the Yelp reviews for the Dulles location shows that Chipotle's breakfast was certainly not without its fans. One reviewer said the a.m. menu was "one of the best fast casual items offered anywhere" and implored the chain to "please bring it back!" Another said she wished Chipotle had breakfast back home and would come back anytime.

While a companywide rollout of a breakfast menu would certainly be a major undertaking, potentially involving kitchen redesigns, new equipment, and training, it's easy to see how it could pay off.

Other chains have stepped up their breakfast offerings lately, with McDonald's rolling out items like pastries and oatmeal, and Yum! Brands' (NYSE: YUM  ) Taco Bell introducing its a.m. "first meal" at 750 locations in January. At McDonald's, which pioneered the fast-food breakfast in 1970s with the introduction of the Egg McMuffin, the morning meal now makes up about 25% of sales, and at higher margins than the standard lunch menu.

Late night
At the other end of the day, Chipotle could easily extend hours at some of its more urban locations. Nearly all Chipotles close at 10 p.m., and none close later than 11 p.m., leaving an opportunity for more sales late at night, especially in bar and nightlife areas in major cities and college towns. It's easy to imagine that one of its restaurants could crank through a late-night line on a Friday or Saturday just as it would during a busy lunch. Unlike adding breakfast, staying open later would be a simple decision and wouldn't require new menu items or operating procedures.

Compared with its competitors, Chipotle's hours are far more limited. About 40% of McDonald's are now open 24 hours a day; Starbucks are generally serving customers at a minimum of 15 hours a day, from 6 a.m. to 9 p.m., if not longer. Taco Bell has also targeted the late-night munchies with its "Fourth Meal" ad campaign.

Chipotle's hours, 11 a.m. to 10 p.m., are about the minimum that restaurants stay open in this day and age, as most need to supplement those core sales with breakfast, late-night food, or alcohol. Extending hours at locations that would support the business could easily add a bump in same-store sales of 5% to 10%, if not more. Furthermore, these additional sales, like any revenue from a breakfast menu, would increase profitability, since the company's already paying for the necessary real-estate-related fixed costs in its stores.

Drive-through
Finally, the drive-through line is an obvious area where Chipotle has resisted conventional industry tactics. While competitors such as Taco Bell and Jack in the Box (Nasdaq: JACK  ) do upwards of 65% of their business through the exterior window, Chipotle management has shunned the strategy, saying it would take away from the face-to-face customer experience that allows patrons to see their food being prepared in front of them.

There's no question that plenty of burrito fiends are clamoring for a drive-through. A Facebook page called "I want a Chipotle that stays open 24 hours and has a drive through" has more than 11,000 likes, while a similar page calling for a drive-through has more than 1,700. There are similar demands on other websites as well.

Many of Chipotle's current locations may not be amenable to drive-throughs, or could require expensive capital outlays to remodel the restaurant accordingly, but as the chain expands across the country, adding drive-throughs could be a huge source of new sales, considering some individual fast-food locations take in as much as 75% of their sales from the car window.

Foolish final thoughts
What's amazing about Chipotle isn't how easily it's run past the competition; it's that it's done it wearing ankle weights and talking on a cell phone. The company's found enormous success in spite of avoiding many of the typical industry tricks.

Restaurant powerhouses such as McDonald's and Starbucks didn't rise to dominance without making some mistakes along the way. The coffee king has done more than a few about-faces on its breakfast menu and was forced to close 600 locations back in 2008, after having saturated the domestic market. McDonald's might be one of the more controversial companies in the world, as the target of screeds such Supersize Me for its gluttonous offerings, and the Golden Arches has had more than a few menu-item fails on its way to "billions and billions sold."

Chipotle management hasn't taken risks like those because it hasn't had to. Its formula has been nearly flawless. But a few more quarters like the one we just saw may have Ells and his honchos looking more fondly at simple add-ons like the ones I've discussed here. It's easy to see how the company can get this burrito rolling once again if need be.

Today, burritos; tomorrow, the world
Chipotle is just embarking on its international expansion, with a few stores in London and its first just opened in Paris, but there are a few other well-known American brands raking in the dough overseas. With middle classes in countries like China and India ready to explode, these stocks look like great opportunities in the coming years. Find out which ones are ready take advantage of this sea change in our special free report: "3 American Companies Set to Dominate the World." Get your free copy now.

Fool contributor Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of Starbucks, McDonald's, Facebook, and Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Starbucks, Facebook, McDonald's, and Chipotle Mexican Grill and writing covered calls on Starbucks. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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