Will Chipotle Continue Its Dominance of Fast Casual?

These three key things will tell you if Chipotle is expanding its lead on Noodles & Company and Panera Bread this quarter.

Apr 16, 2014 at 12:40PM

After a remarkable fourth quarter, Chipotle Mexican Grill's (NYSE:CMG) status as the "king" of fast casual was established. The results were even more impressive when compared to the sluggish restaurant industry. But in this competitive industry, investors are wondering if Chipotle can keep fast-casual counterparts Noodles & Company (NASDAQ:NDLS) and Panera Bread (NASDAQ:PNRA) at bay. 

Chipotle reports first-quarter earnings this Thursday. Here's what to watch.


Same-store sales and market footprint
In its most recent quarter, Chipotle's same-store sales grew a whopping 9.3%. That's remarkably impressive, made more so by comparison to the comparable sales growth of strong competitors like Panera Bread (1.3%) and Noodles & Company (4.7%). This discrepancy says much more about Chipotle's unusual growth than anything specifically negative pertaining to Noodle, or Panera. 

But it's important to remember that Chipotle likely won't give us a number like that again. That's not a bad thing, even if the market treats it that way.

After all, last quarter's figure was Chipotle's highest comparable sales result since 2012, and it bucked the flat (or negative) growth experienced by most restaurants, thanks to miserable weather.

Same-store sales really matter for restaurants, because it gives us an idea of how sustainable the concept (and growth) is. At the end of its fourth quarter, Chipotle had 1,595 total restaurants. By comparison, that gives it substantially more locations than Noodles & Company's 380 stores, and with management planning on adding at least 180 new locations this year, it's closing in on Panera's (nearly) 1,800 locations. 

Some analysts think Chipotle could support twice its current store count (or more), and with industry-leading comps, it's hard to disagree. But new Chipotle locations will make it much easier for burrito lovers to access Chipotle, so you should expect comparable sales growth to be (slightly) less robust at some point. And that's what makes Chipotle's ShopHouse concept so important: We need it to work because it can keep comparable sales growth high even as traditional Chipotle stores expand. 

So here's what investors should be listening for this quarter. Expect comparable sales to grow at a slower rate than last quarter's staggering figure. If comps can stay positive (say, higher than 3%), and if management also gives some more details about ShopHouse's  plans for 2014 and beyond, then this should be viewed as a solid quarter. 

Cost headwinds 
Last quarter, Chipotle's food, beverage, and packaging costs rose 22%. The company still grew net income by 17.8%. Management also recently said that a move to a $10 minimum wage would hurt Chipotle less than most restaurant chains, because the average worker already makes about $9 per hour. 

With all that said, food costs have surged lately, particularly beef costs, and Chipotle's ability to control those costs will be a key to its growth plans. For this earnings call, let's listen for guidance on Chipotle's costs as well as management's comments on how the company is handling increases.

So far, the company has established tremendous pricing power over its peers, and investors should be aware of how essential this is to an investment thesis for Chipotle.

Keep it in context
Some analysts think Chipotle's stock is "expensive" (even though it trades at just 30 times forward earnings). For this reason, it would not surprise me if the stock had a good quarter (but not a great one), and the stock sold off anyway. 

That type of nonsensical drop hasn't happened since 2012, and it turned out to be a wonderful buying opportunity. Stocks that miss analysts' earnings guesses, or ones that give realistic outlooks, often sell off despite strong results

Chipotle, thanks to its anti-GMO stance, is viewed as both uniquely delicious and healthy by its loyal fans. Those two things rarely mix, and when they do, restaurants tend to print money as a result.

If Chipotle can exhibit positive comparable sales, and if the ShopHouse rollout is working, all while containing costs, you should stay bullish on the company (even if Mr. Market does not). 

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill and Panera Bread. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers