Fast-casual Mexican restaurant chain Chipotle Mexican Grill (NYSE:CMG) possesses many qualities that could translate into long-term capital gains. The long-term potential of Chipotle also exceeds that of its competitors Yum! Brands' (NYSE:YUM) Taco Bell and Jack in the Box's (NASDAQ:JACK) Qdoba Mexican Grill. Here's why.
Even though it's hard to quantify, Chipotle executives feel that active engagement with its stakeholders, such as employees and customers, helps strengthen its overall brand and drives customer traffic. Chipotle grooms its high-performing employees for promotion into leadership roles, giving everyone an incentive to perform highly in an effort to earn those promotions. In addition, when asked about the effects of a possible minimum wage hike, executives responded by saying it wouldn't affect them much because they already pay more than $9 an hour.
Chipotle wants to make sure that customers get educated in its "do good" philosophy through creative means. In the most recent earnings call, company executives highlighted its "Scarecrow" marketing program, complete with an animated short film and mobile phone games. Chipotle also recently produced four 30-minute episodes of a comedy called Farmed and Dangerous that "explores the world of industrial agriculture in America." Company executives also underscored to analysts its intentions to eliminate GMOs from the menu. Other attempts at customer engagement include Sofritas, a vegan tofu proving popular among vegetarians and meat eaters alike.
Chipotle's engaging philosophy, perceived product quality, and expansion translate into top- and bottom-line growth. The company opened 185 stores last year. For 2013, company revenue and net income expanded 18% each. Chipotle's free cash flow expanded an impressive 48%. However, its margins suffered a little due to food cost inflation. Company executives will observe economic conditions throughout 2014 to determine the merit of a price increase in an effort to curb eroding margins.Chipotle sits on a pristine balance sheet with cash comprising 21% of stockholder's equity and possesses no long-term debt.
Competition doesn't measure up
Success makes you a target and attracts competition. Qdoba Mexican Grill serves to compete directly with Chipotle; however, it struggles in the face of intense competition, which highlights Chipotle's strength and reputation. According to the latest figures, in 2013 Jack in the Box closed more Qdoba Mexican Grills than it opened, for a total net loss of 12 units. However, Qdoba signifies a bright spot for Jack in the Box, with Qdoba's company revenues expanding 22% last year. Unfortunately, Jack In the Box, which competes in the crowded hamburger arena, saw its 2013 company revenues decline 10%, serving as a drag on overall revenue. The company's overall 2013 revenue declined 1% as a result.
While both Chipotle and Qdoba exude a fast-casual feel, Taco Bell seeks to cater to the value-conscious fast-food consumer. In addition, Yum! Brands and its franchisees operate nearly 6,000 Taco Bell stores, compared to Chipotle's 1,600 stores, meaning Taco Bell has less room for expansion. Also, in contrast to Chipotle's transparent and sterling supply chain reputation, Yum! Brands' "poultry supply incident" in China KFCs last year probably still haunts the minds of some of its customers, giving them pause before entering a Yum! Brands restaurant, including Taco Bell. Yum! Brands saw its revenue decline 4% in 2013.
Chipotle plans on building between 180 and 195 stores in 2014. Also, the company already exhibits signs of wanting to diversify, with investments in new restaurant concepts such as ShopHouse and Pizzeria Locale. Perhaps Chipotle will morph into another Yum! Brands in a few decades. Businessweek estimates a 37% increase in revenue for Chipotle over the next year.
Jack in the Box also maintains a long-term goal of growing both its hamburger and Qdoba Mexican Grill businesses. However, Businessweek paints a bleak picture for Jack in the Box as a whole, estimating 2014 revenue declining 7%, with 2015 revenue being even with 2013. If store closings accelerate, investors should stay away from Jack in the Box. Yum! Brands will most likely heal from its bird flu crisis, assuming nothing else happens in the new frontiers of emerging markets. Businessweek estimates 12% top-line growth for Yum! Brands in 2014. Add Chipotle Mexican Grill to your Motley Fool Watchlist. Its positive philosophical underpinnings and growth prospects make the stock worthy of your research time.
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William Bias has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.