Chipotle Mexican Grill (NYSE: CMG) reported strong earnings on Thursday, and shares of the fast-casual burrito chain popped like bacon in a frying pan. By Friday morning, the stock had gained 13% to climb well over the $500 mark.
Following a humdrum holiday season in the restaurant industry, the market welcomed Chipotle's revenue growth of 20.7% for the quarter and 17.7% for the year. Even more appetizing was the piping-hot earnings growth: Chipotle's earnings per share increased 29.7% and 19.7% for the quarter and year, respectively.
On Chipotle's conference call, management spoke about everything from avocado prices to its cutting-edge miniseries project. Here are the 10 insights I found most interesting.
1. Chipotle has its fingers in more pies than ever. Last year, Chipotle launched a catering business, introduced a vegan option known as Sofritas to the menu, expanded its Asian concept ShopHouse, and invested in a pizza chain. It was a busy year. Today, catering sales represent 1% of overall revenue, and Sofritas contributes 3% of sales. Meanwhile, Chipotle rolled out six ShopHouse locations, and its joint venture pizza operation, Pizzeria Locale, opened in Denver. Also, despite its currently small equity interest in Pizzeria Locale, Chipotle "could become the majority owner over time, as the concept expands." In many ways, Pizzeria Locale looks like an extension of everything Chipotle does well, including impressive restaurant economics, high-quality ingredients, and classic cooking techniques.
2. As the GMO battle rages, Chipotle's exiting stage right. Few issues spark heated debate like genetically modified food products. The back-and-forth over high-tech corn kernels can be nauseating. Chipotle's decided to opt out altogether. Already, all of the restaurant's cooking oils are GMO-free, and the company has "only a few key steps left" to rid its supply chain of GMOs by the end of 2014. Chipotle believes this move coincides with its "larger mission to change the way people think about and eat fast food."
3. The avocado prices are too darn high! Food costs at Chipotle were 33.9% for the year, up 50 basis points from 2012. The culprit? Those fleshy green fruits loaded with good fats. "Avocado prices continue to remain high and are expected to remain elevated throughout 2014." Apparently, the singer-songwriter Jason Mraz can't grow them fast enough. (No, seriously, Mraz sells avocadoes to Chipotle.) Management expects food costs to creep upward to 34.5% of sales in 2014.
4. There's no business like show business. Chipotle is keeping its day job rolling burritos, but also trying its hand at an online miniseries. Chipotle's launching Farmed and Dangerous, an "original scripted comedy series that satirically explores the world of industrial agriculture in America." I dove into this intriguing development earlier this week.
5. Chipotle is cooking up an entrepreneurial culture. Chipotle continues to develop managers into "restaurateurs" who can nurture other employees and assume greater leadership positions. Chipotle now has nearly 500 restaurateurs, up from 400 in 2012, who lead more than two-thirds of the entire restaurant base.
6. An expanding restaurant base for a growing appetite. Chipotle commented on its hesitancy to overexpand, stating, "Part of our philosophy is that it is much better to allow demand ... to be in front of supply so that we are fulfilling a demand that we have created in the marketplace." With that said, Chipotle must see demand, as it aims to open between 180 and 195 restaurants in 2014. This total would be about on par with the 185 opened in 2013.
7. Could your burrito cost more in 2014? Chipotle's chief financial officer, Jack Hartung, expects the company to "be in a position to raise prices sometime in the third quarter." However, he claims Chipotle's in no hurry, and hinted at the possibility of no price increase depending on cost inflation. Maybe you won't have to skip the chips, after all.
8. The minimal effect of a minimum wage increase. When pressed about potential changes to the minimum wage, Hartung seemed unconcerned, stating: "We don't pay minimum wage. Our average wages are above $9 for our hourly employees, so a move up to $9 would have minimal effect. A move to $10 would have an effect, but not too significant, and I would say that the impact on us would be much less than others. And so, you would see an impact on our margins, but it would be something that we could certainly absorb." Meanwhile, Chipotle's competitors (and former owners) might be facing a more daunting reality if the minimum wage hike takes effect.
9. The future of burrito technology. OK, there's not a lot of technology that goes into a burrito, but Chipotle claims to be experimenting with mobile payments, and investing $10 million in upgrading networks in restaurants. Furthermore, the company claims it has no "appetite for a traditional loyalty program," and intends to use mobile payments only if they increase throughput of customers. Chipotle looks like a veritable Luddite next to Starbucks, but also witnessed no slowdown in holiday traffic due to online shopping, unlike its coffee-focused peer.
10. Chipotle's secret ingredient for success. When pressed by analysts to describe Chipotle's competitive advantage, co-CEO Monty Moran cited "a very unique people culture" and a "focus on Food With Integrity." In his eyes, "No one else is really doing this sort of thing, so I think ... we are in a category of our own."
All in all, Chipotle's management team continues to run a multibillion-dollar restaurant chain like clockwork. With its fine-tuned operation, Chipotle now has its sights set squarely on revolutionizing the fast-food industry. Current shareholders can sit back and enjoy the momentum Chipotle's built heading into 2014.
For those looking to pick up shares, it's not too late, in my opinion. Yes, Chipotle trades at more than 30 times annual cash flow, but it's also rapidly building a fast-casual restaurant empire. That's a movement few long-term investors want to miss out on.
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