Almost no restaurant chain of this era has been as successful as Chipotle Mexican Grill (CMG 1.31%).
Founded in the early 1990s by Steve Ells, the burrito chain essentially invented the fast-casual concept and is now worth $37 billion, more than any other restaurant company aside from McDonald's and Starbucks.
The company has survived recent challenges like the 2015 E. coli outbreak and the coronavirus pandemic and is now thriving under CEO Brian Niccol. Since the beginning of 2020, its stock is up 59%, and the company just posted record earnings per share in its first-quarter earnings report, even as foot traffic declined sharply during the pandemic.
Building on momentum from its digital channel, Chipotle seems to have a bright future ahead of it. But shares aren't cheap -- it's trading at a price-to-earnings ratio over 50 based on this year's expected earnings.
What does Chipotle's long-term future hold? Let's take a look at where the company could be in 10 years.
What the numbers say
Chipotle finished the first quarter with 2,803 restaurants and an average unit volume (AUV), or sales per restaurant, of $2.3 million, with a restaurant-level operating margin of 22.3%.
Chipotle's ability to add new restaurants while improving the two other metrics above will be the most important factor in determining the company's performance 10 years from now. The company is targeting 200 restaurant openings for the current year, and Niccol said the burrito chain's long-term goal is more than 6,000 restaurants, AUVs above $2.5 million, and restaurant-level operating margins of at least 25%.
If we assume that Chipotle, which doesn't franchise its restaurants, can accelerate its store openings over the next 10 years, it could average 250 openings between now and 2031, giving it 5,300 restaurants in a decade, essentially doubling its current total.
Average unit volumes will trend higher due to inflation, but Chipotle has also proven its ability to add capacity with the digital side of the business. That includes its mobile app, Chipotlanes, as well as an additional make line at its physical locations. Therefore, it seems reasonable that Chipotle will get to at least $3 million in AUVs, and potentially up to $3.5 million in average volumes. Finally, regarding restaurant-level operating margins, the company won't get a natural tailwind from inflation, but 25%-30% seems like a reasonable range as the business normalizes when the pandemic ends and higher traffic improves margins.
Based on those numbers, the company's sales would range from $15.9 billion to $18.6 billion, up from $6 billion a year ago. Restaurant-level operating profit would range from $4 billion to $5.6 billion, and an overall profit margin of 10%-12% would translate into $1.59 billion to $2.23 billion in net income. Chipotle has been repurchasing its own stock, and it seems fair to estimate a 10% reduction in shares outstanding over the next 10 years, giving the company roughly 25 million shares outstanding.
According to that math, Chipotle would have earnings per share between $63.60 and $89.28 in a decade, about triple the $24.53 analysts are forecasting.
More room for growth
Ten years is a long way, but the company will likely still be a growth company -- Chipotle has little direct competition in burritos or Mexican fast-casual in general, and there's still a huge international market for it to penetrate. In fact, management noted recent success in Canada, where it now sees room for at least a few hundred restaurants, and the company has recently introduced a number of new features that could boost growth ahead of the path outlined above. Those include Chipotlanes, its loyalty program, new menu items like quesadillas, and further growth in digital and delivery.
If the company is still executing and growing at a steady pace in 10 years, Chipotle could still warrant a high multiple, making the stock worth $3,000 or more.
In many ways, Chipotle seems to be following the path of Starbucks, a restaurant chain that has continued to put up strong profit growth, despite being seemingly ubiquitous.
At its current price, Chipotle stock won't repeat the monster run it's had over the last few years, but the company still has enough competitive advantages and growth opportunities to outperform the market over the next decade.