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Better Buy: Starbucks vs. Chipotle

By Neil Patel - Jan 21, 2021 at 8:30AM

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The pandemic has affected both businesses in different ways. Which one should you own?

Starbucks (SBUX 2.03%) and Chipotle Mexican Grill (CMG 1.70%) are both outstanding businesses that revolutionized their respective food and beverage categories. The ubiquitous coffeehouse chain made it trendy to pay a premium for a daily cup of joe, while the Tex-Mex-inspired fast-casual pioneer found success delivering fresh, great-tasting food quickly. 

Chipotle is the hotter stock right now, as its shares have climbed roughly 70% over the past 12 months. Having fully recovered from the coronavirus pandemic, its business has returned to growth. This is in contrast to Starbucks, whose sales in the most recent quarter were still below the prior-year period. 

Investors contemplating which stock to add to their portfolios need to assess the long-term outlooks for these companies following what was a disruptive 2020. Let's dive in and find out which of these consumer favorites might deserve your capital investment.

man with hands on hips looking at wall with buy or sell decision

Image source: Getty Images.

The case for Starbucks 

As alluded to above, Starbucks' revenue of $6.2 billion in the fourth quarter of 2020 (ended Sept. 27) was 8.1% lower than the year-ago period. But, compared to the 38.1% decline registered in the Q3 2020, this figure is vastly improved. 

It was evident early on when shelter-in-place orders were instituted that Starbucks' reliance on a morning rush of customers would be negatively affected as people started working from home and no longer commuted to the office. After being forced to close most of its stores, approximately 98% of Starbucks company-owned locations were back open at the end of the fourth quarter. 

While it's anyone's guess on the permanence and magnitude of the work-from-home trend, the company expects to record impressive gains in fiscal 2021. Management guided global comparable store sales, or comps, to soar 18% to 23% next year, with U.S. segment comps rising at least 17%. 

In order to achieve this, Starbucks will need to continue leaning heavily on its increasingly important mobile platform, which currently has 19.3 million 90-day active rewards members. The mobile app, coupled with an expanding drive-thru presence, drove 75% of U.S. sales volume in the most recent quarter. 

Although roughly 15,000 of Starbucks' nearly 33,000 stores are located in the U.S., growth will be driven primarily by international expansion in the next decade. During the company's biennial investor day in December, CFO Patrick Grismer said the company "will reach approximately 55,000 stores across 100 markets by the year 2030." Most of this growth will come in China, where Starbucks is expected to open 600 net new stores in fiscal 2021. 

The coronavirus pandemic will prove to be a blip on Starbucks' radar, as the coffee chain has ambitious plans to dominate globally. 

The case for Chipotle

Even as indoor dining was restricted all throughout the country, Chipotle's business was well-equipped to successfully navigate the pandemic. During 2019, the company completed the installation of mobile order pick-up shelves in almost all its stores. And it had already begun to add Chipotlanes (its drive-thru offering) as well as delivery options for hungry customers. With this solid foundation in place, digital sales (which include pick-up and delivery) grew at an already superb 90% and accounted for 18% of sales in 2019. 

However, the onset of the coronavirus pandemic was the ultimate stress test for these initiatives, and Chipotle responded very strongly. In the second and third quarters of 2020, digital sales more than tripled from the prior-year periods, with this channel now accounting for nearly half of overall revenue. This is a great example of how the health crisis accelerated shifts in consumer behavior. Chipotle was prepared to satisfy those cravings. 

After posting 14.1% sales growth and opening 44 new restaurants in the most recent quarter, Chipotle is poised to continue broadening its footprint. It now has 2,710 locations, but CEO Brian Niccol has confidence that his company can eventually amass over 6,000 restaurants. Add this unit growth to comps that are still increasing in the high-single-digit percentages, and investors have plenty to cheer about. 

Chipotle's continued aim to incorporate technology into its business model is paying off. Its 17 million rewards members give the business a valuable opportunity to increase engagement with loyal customers, which will support the company's expansion plans. 

The takeaway for investors

Both of these businesses are headed in the right direction and are bouncing back from the disruption caused by the pandemic, albeit at a different pace. As Starbucks was hurt by the reduction of morning commutes due to the shift to work-from-home, Chipotle's fast-casual operation, affordable menu items, and easy-to-transport food made it perfectly suited for the current situation. 

I believe these are both fantastic companies to own, but Chipotle is the better buy right now. Its competitive positioning has strengthened as a direct result of the coronavirus pandemic, and the business exhibits better growth prospects, particularly in the U.S.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$73.39 (2.03%) $1.46
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,294.11 (1.70%) $21.62

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