Will Chipotle Continue Its Dominance of Fast Casual?

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.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2914780, ~/Articles/ArticleHandler.aspx, 12/20/2014 6:10:18 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement