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Although anecdotal evidence is never the be-all and end-all, one factor of investing in retail stocks is the mix of fun and function. Take the simple observations one can make in, say, a shopping mall. Peter Lynch said, "Invest in what you know," and there's something to be said for an investing sector in which some research can be conducted in person.
I watched for some interesting data during a recent retail check at a major upscale mall near Fool HQ. Given retail's slew of disappointing quarterly results recently, it's time to look around.
Granted, my mall visit wasn't optimal: It was daytime during a week when many kids had already gone back to school, but still, plenty of mall wanderers and super-sale signs at retailers gave me an idea of what's moving and what's not.
I like to look at bags. Maybe that sounds a bit creepy, but I do try to notice if shoppers bought anything and, if so, which stores seemed to have charmed them. The weirdest thing is, although it was about 2:30 in the afternoon, the bag that was by far the most popular in a crowd of shoppers who hardly possessed bags from the neighboring retailers was a shocker: Chipotle (NYSE: CMG ) .
Attention shoppers... and stock watchers
From checking out the food court from near and far (from an upper-tier vantage point, and fine, I also did sit down and have a burrito bowl for sustenance for the walkabout), I noticed the vast majority of people in the court were carrying, or had set, Chipotle bags at their tables. Other fast-food competitors' bags or trays were few and far between.
Food court competitors at this particular mall include major options: McDonald's (NYSE: MCD ) , Popeye's, Panera, Subway, Johnny Rockets, as well as several quick-serve names I'm not familiar with, like Harry's Smokehouse Burgers & BBQ.
Most interestingly, though, Yum! Brands' (NYSE: YUM ) Taco Bell is basically right next to the Chipotle in that particular food court. Taco Bell had no substantial line, and just a few customers trailing to its counters once in a while. Sorry, David Einhorn and other Chipotle skeptics, the thesis that Taco Bell would or even could steal market share from Chipotle appears to be just as outlandish as many of us believed.
Viewing customer traffic from this side-by-side vantage point was eye-opening. If anyone's stealing market share in this Mexican match-up, it appears to be Chipotle.
Keeping an eye on growth
It's worthwhile to go back to brave the hardcore weekend throngs of mall crawlers to collect more data. Still, for whatever reason, this particular Chipotle and its burritos were going like gangbusters. In addition, the burrito-making team was incredibly swift and efficient. They have to be, for lines like that.
Anecdotal evidence is never enough for a full investment thesis. However, it can at least bolster one's visual sense of a business's performance. And some of the Chipotle-centric behavior I observed certainly segues with recent quarterly results.
Chipotle's recent results have reestablished it in investors' good graces after it got slammed by Einhorn's Taco Bell thesis. Just last quarter, Chipotle's same-restaurant sales increased 5.5%, and total revenue increased 18.2%. Net income jumped 7.6%.
According to Yum!'s most-recent quarterly results, also released in July, Taco Bell did report same-store sales growth in the U.S., but it's not incredibly impressive at 2%.
Chipotle's former parent McDonald's has been in a longtime trough. Its most recent quarterly results paled in comparison to Chipotle, too, and it's well established that it needs a turnaround. Obviously, we do know that McDonald's is a profitable company and a dividend payer, but if growth gets choked, that's a problem for the investment. Its same-store sales rose an incredibly anemic 0.7%.
Hungry for long-term winners
For many self-identified value investors, Chipotle's valuation likely looks appalling at 32 times forward earnings. Yum! Brands and McDonald's certainly look cheaper in the fast food realm, at 19 and 16 times forward earnings, respectively.
However, Chipotle appears to be as popular as ever, and recent numbers back that up. Other fast-food rivals are struggling for growth, and what may look like relative bargains may indeed prove to have been expensive at these levels over the long run. Chipotle's a keeper, and even a buy for long-term investors; buying on the Einhorn-sparked dip ended up being a great way to get a real bargain. Quality companies pay off over the long run.