Is It Too Late to Invest in Chipotle?

Source: Chipotle Mexican Grill.

It's no secret at all that Chipotle Mexican Grill (NYSE: CMG  ) has delivered spectacular growth for investors over the last several years, and recent reports from fast-casual competitors like Panera Bread  (NASDAQ: PNRA  ) and Potbelly (NASDAQ: PBPB  ) confirm that this kind of performance is quite unique in the industry. Can the run continue or will this tasty burrito company get colder in the coming quarters?

Chipotle versus the rest
Chipotle has generated sales growth of 19.3% per year through the last five years, which makes the company a clear growth leader in the fast-casual restaurant business. It would even be perfectly understandable for the company to slow down as sales have now surpassed the level of $3.2 billion per year in 2013, but there is no deceleration in sight judging by recent performance.

Sales during the fourth quarter of 2013 grew 20.7% to $844.1 million, comparable restaurant sales increased by an explosive 9.3% during the period, and Chipotle opened 56 new restaurants in the quarter, bringing the total store count to 1,595 locations.

Food costs were on the rise during the quarter, but the company still managed to increase profit margins via favorable sales leverage and lower marketing costs. Restaurant-level operating margin increased by 100 basis points to 25.6%, and diluted earnings per share grew by 29.7% in fourth-quarter 2013 versus the same period in the prior year to $2.53 per share.

Panera has been another notable name among fast-casual restaurant chains over the last several years, but the company disappointed investors with lower-than-expected growth rates in recent quarters. Panera reported earnings for the fourth quarter of 2013 on Tuesday, and the company's performance pales in comparison to Chipotle.

Sales during the quarter increased 16% to $662 million, but comparable bakery-cafe revenues grew by a lackluster 1.7% at company-owned locations. Diluted earnings per share grew 12% during the quarter. Panera still offers higher-than-average growth compared to other companies in the industry, but the company is no match for Chipotle.

Potbelly had its IPO in October 2013 and attracted a lot of attention from investors as many believed the company was on track to becoming another high-growth story in the fast-casual segment. But performance has been materially below expectations so far.

Like Panera, Potbelly announced earnings for the fourth quarter of 2013 on Tuesday, and the difference compared to Chipotle is quite remarkable. Total revenues increased 1.7% to $74.8 million during the quarter, and company-operated same-store sales increased 0.7% versus the prior year.

In spite of being materially smaller, Potbelly can't even begin to compete against Chipotle in terms of growth.

Can it continue?
Strong performance in same-store sales shows that demand for Chipotle's organic burritos is still as hot as it gets. And new store openings are not cannibalizing sales at existing locations by any means, so there is plenty of room to continue expanding the store base in the U.S.

The company has only 16 stores in international markets, which means there's enormous room for expansion for years to come. In addition, Chipotle has recently expanded to new concepts such as Asian cuisine and pizza with ShopHouse and Pizzeria Locale, respectively. It's far too early to tell if these new ventures will take off, but considering Chipotle's history of success, investors may want to keep an eye on these projects.

Still, management remains focused on expanding its Chipotle store base in the U.S. over the coming years, so international markets and new concepts will have to wait until the company increases its local market penetration rate.

In the words of co-CEO Steve Ells: "We remain encouraged by the potential for all of our growth seeds, including the new concepts in the international locations and know that success from any one of them may give us new avenues for future growth, but for the foreseeable future, however, our growth will be driven primarily by opening Chipotle restaurants in the United States." 

Bottom line
Chipotle's performance is nothing short of outstanding, and comparison with competitors like Panera and Potbelly makes the company look even more extraordinary. The company still has plenty of potential for expansion in the U.S. and international markets, and new concepts could be additional growth drivers in the long term. Make yourself comfortable at the table, because Chipotle is positioned to continue delivering spicy growth rates for years to come.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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