Is It Game Over for Chipotle?

Source: Chipotle

After shares of Chipotle Mexican Grill (NYSE: CMG  ) dropped 6% on April 17, investors might be thinking that the stock has finally run out of steam . The fall in the company's share price follows its first-quarter earnings release and points to a picture that some analysts see as very bearish for the business.

However, this is unlikely to be the case. If anything, the situation at Chipotle looks to be better than even Mr. Market anticipated, which could extend the company's lead over Panera Bread  (NASDAQ: PNRA  ) and Yum! Brands (NYSE: YUM  ) .

Chipotle posted strong growth, but terrible price movements hurt!
For the quarter, Chipotle reported revenue of $904.2 million. This represented a 24% gain compared to the $726.8 million reported in the year-ago quarter and was more than 3% above the $873.8 million investors hoped to see.

According to the company's earnings release, the jump in sales was driven by a variety of factors. Chief among these was the 13.4% increase in comparable-store sales the business reported compared to the first quarter of 2013. This was due, for the most part, to increased traffic but was also favorably affected by an increase in average ticket.

Source: Chipotle

Another significant driver behind the company's growth compared to last year was an increase in restaurant count. During the quarter, the company added 44 new restaurants and -- over the past year -- increased its number of locations in operation by 12% from 1,458 to 1,637.

From a revenue perspective, it's hard to deny that Chipotle's growth has been anything short of stupendous. Unfortunately, the same cannot be said for the company's rise in profits. For the quarter, management reported that earnings per share came in at $2.64. Although this was 8% higher than the $2.45 the business reported in the year-ago quarter, it fell a good level shy of the $2.87 Mr. Market anticipated.

Despite benefiting from higher revenue, Chipotle's bottom line failed to keep up primarily due to rising in costs. The main contributor to the company's lackluster profits was its cost of food, which rose from 33% of sales to 34.5% mostly because of soaring beef, cheese, and avocado prices. In response to this, management stated that the prices it charges customers will rise by summer, probably in the range of 3% to 5%.

Is Chipotle out cold?
Out of fear that price increases will cause Chipotle's customer base to feel disenfranchised, investors pushed the company's stock price down. If the company had been experiencing poor revenue growth or small profits over an extended period of time, it's probable that this decision by management could indeed harm the business. However, the company's long-term performance seems to indicate that Chipotle is quite healthy.

Source: Chipotle

Over the past few years, Chipotle has been a true growth machine. Between 2009 and 2013, the company saw its revenue skyrocket 112% from $1.5 billion to $3.2 billion. Panera, one of Chipotle's biggest rivals, saw its top line increase only 76% from $1.4 billion to $2.4 billion during that same time frame; Yum!, the parent of Taco Bell, saw its revenue climb just 21% from $10.8 billion to $13.1 billion.

In its annual report, Chipotle attributes its sales jump to a nice mix between higher store count and comparable-store sales. During this time period, the company's number of locations in operation increased 71% from 956 to 1,637, while its aggregate comparable-store sales rose 41%.

CMG Revenue (Annual) Chart

Chipotle revenue (annual) data by YCharts

Both of these metrics far outpaced Panera's performance over the same period of time. During the past five years, Panera's revenue grew because of a 29% increase in store count from 1,380 to 1,777. However, the aggregate 29% rise in comparable-store sales has helped the business immensely as well.

Meanwhile, Yum! has been unable to compete with fast-casual competitors, particularly in the U.S. Between 2009 and 2013, the company's U.S. comparable- store sales have been nearly flat. However, management has seen some positive results coming from China, India, and most of its remaining international operations. This, combined with the 9% improvement in store count from 37,080 locations to 40,311 the company enjoyed, helped push its revenue up a bit.

Foolish takeaway
Based on the data provided, it's easy to see why investors are concerned about Chipotle's ability to grow earnings as quickly as it grows revenue. However, with strong revenue growth over an extended period of time, it's unlikely that the business will be adversely affected. Yes, there is a chance that its comparable-store sales growth might slow if prices rise too high. But with a strong and growing presence in America's dining industry, the company's future probably hasn't looked brighter.

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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.

  • Report this Comment On April 23, 2014, at 6:24 PM, EquityBull wrote:

    Chipotle the company will do just fine but the stock is about 100+ ahead of itself. Many years of growth well above its profit expansion is priced in. This needs adjustment to fair value. Furthermore less of the top line translates into profits. Profits are all that matter. Shareholders can't get paid in revenues. It takes profits.

    At best CMG might see 20% profit growth going forward. 8.5% was last quarter so they have to jump alot from there and the 5% price increase could come with decreased visits so it could be a wash. Assuming 20% growth would be fair value at 20PE that gets you to (20 x 16/share eps 2015) would be 320/share. Even if you up that to 25 times which would be a PEG over 1.0 that is a target of 400/share on 2015 earnings.

    I believe another 100 of downside is coming. After that the stock is fairly valued. Not over or under valued. No margin of safety at 400. Just a good company at a fair price (assuming they can get eps back to 20% growth YOY)

  • Report this Comment On April 24, 2014, at 10:03 AM, whodidntante wrote:

    EquityBull, your best CAPS pick of all time was CMG (outperform), and yet I see no underperform pick for CMG currently?

  • Report this Comment On April 24, 2014, at 10:06 AM, whodidntante wrote:

    I see CMG as a dynasty in the making. I don't know why anyone would insist a dynasty should be "fairly" valued. I'm sure you can get "fair" growth and "fair" returns from a "fairly" valued company... need I suggest where the superior growth and returns come from?

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