Despite giving investors plenty to cheer about, Chipotle Mexican Grill (CMG +3.61%) and Starbucks (SBUX 0.11%) both saw a 2% dip immediately after their respective quarterly earnings were announced over the past week and a half. While the market may have had its own reasons, these events stress the importance of zooming out and focusing on the long term when analyzing such fantastic businesses.
Let see why these two companies are among the best in the restaurant industry, and why they should be on your radar.
Image source: Chipotle.
Focus on the consumer
Both Chipotle and Starbucks are recognized for providing a fantastic guest experience. They do this by focusing relentlessly on the customer in an attempt to win repeat business, supported by digital initiatives.
In the first quarter, which ended March 31, Chipotle announced that it had reached more than 21 million loyalty members. This is after launching the program just over two years ago in March of 2019. The convenience of being able to order ahead for pickup or delivery while earning perks keeps customers happy. More than half of all revenue in the quarter was derived from the digital channel.
Starbucks introduced its rewards program in 2009 and now has 22.9 million members. These customers are a significant driver of business, as an impressive 52% of U.S. company-operated sales in the second quarter came from these rewards members. CEO Kevin Johnson believes Starbucks can reach 40 million members.
Not only do these loyalty members have more frequent and larger order sizes, they also provide Chipotle and Starbucks with extremely valuable data that can be used to offer personalized recommendations, further increasing engagement.
Best in class
Looking at the financial metrics of these restaurant concepts shows us just how powerful the brands are.
Same-store sales (comps) jumped 17.2% and 15% in the quarter for, respectively, Chipotle and Starbucks. While the Tex-Mex chain is still benefiting from a pandemic-fueled boost, the coffee giant is seeing its U.S. business turn things around and return to growth as the economy reopens. Other retail food and beverage companies wish they had comps this strong.
Additionally, operating margins are very healthy. Chipotle's restaurant-level margin (total revenue less direct restaurant operating costs) stood at 22.3%, an increase of 4.7% from the prior-year period. Starbucks, on the other hand, reported an operating margin (for its Americas segment) of 19.4%, which was up 5.1% from the year-ago period.
Image source: Starbucks.
These numbers are best-in-class in the restaurant industry, as the average fast-casual establishment only produces an operating margin in the range of 6% to 9%. Chipotle and Starbucks are extremely popular, so it should be no surprise that their key financial metrics back up just how strong their businesses are. This is exactly what investors should be looking for.
Growth is far from over
Chipotle's CEO, Brian Niccol, is confident that his company can go from its current footprint of 2,803 stores to 6,000 one day. Leaning on the digital capabilities previously mentioned, he'll look to do this by experimenting with more convenient options for consumers. These include different store formats and designs, with continued growth of the Chipotlane drive-thru concept.
Starbucks, already with nearly 33,000 locations globally, has even bigger plans. By the year 2030, the business is aiming for 55,000 stores, which would make it the largest restaurant chain in the world. Time will tell whether this ambitious target can be reached, but growth will definitely be driven by the China region, where Starbucks plans to open 600 net new stores in fiscal 2021 alone.
The final word
Investors looking to put money to work in the hyper-competitive restaurant space should keep these two names on their watch lists. Both are pioneers in their respective categories, lean heavily on their technological prowess, exhibit strong economics, and still have plenty of growth left.
Chipotle, currently trading at a forward P/E of 43, is much more expensive than Starbucks (at 32 times forward earnings). The former should be purchased if there is a sizable pullback in the stock price, while the latter looks like a buy at today's price.
Valuation certainly matters no matter how excellent the business is, and it should be a tool that investors use before making a purchase. One thing is for sure, though: These are two companies that must be on your radar.
