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Better Buy: Starbucks vs. Chipotle

By Neil Patel - May 29, 2021 at 7:27AM

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The winner here ultimately comes down to price.

Starbucks (SBUX -1.17%) and Chipotle Mexican Grill (CMG -0.54%) are well-known restaurant concepts that have long benefited from powerful brand recognition and extremely popular menu items. They each navigated the pandemic in their own ways, but both are poised to do well for many years to come. 

The ubiquitous coffeehouse chain has slightly outperformed the S&P 500 over the past 12 months, while the Tex-Mex fast-casual pioneer has underperformed by a sizable margin. Read on to see which is the better buy today. 

burrito and cup of coffee on a wooden table

Image source: Getty Images.

Starbucks 

Starbucks' business is back to registering growth following the impact of the pandemic a year ago. In the most recent quarter (the second quarter of 2021), global same-store sales increased 15%, while in the U.S. they rose 9%. This is a positive development, particularly because people are returning to offices for work, which leads to more coffee runs during morning commutes. 

The company has one of the best loyalty programs around. As of March 28, 22.9 million customers in the U.S. were Starbucks rewards members, a gain of 18% from the prior-year period. An impressive 52% of U.S. company-operated sales came from this customer group. This program is extremely valuable and provides Starbucks the opportunity to gather rich insights about buying behavior. 

With nearly 33,000 stores worldwide, it's easy to wonder where the growth will come from. But Starbucks has ambitious plans over the next decade. By 2030, the company expects to have a total of 55,000 locations open in 100 markets. China is going to be a major driver of expansion; Starbucks plans to open 600 net new stores there (out of 1,100 total net openings globally) this fiscal year. 

Management raised its guidance for fiscal 2021 for revenue, operating margin, and earnings per share (EPS), a clear vote of confidence for the company's pandemic recovery. The stock currently trades at nearly 32 times forward one year earnings, which is reasonable given the quality of Starbucks' business. 

Chipotle 

Chipotle had another fantastic first quarter in the three months ended March 31. Sales soared 23.4%, while comps jumped 17.2%. The company thrived during the pandemic (and continues to) due to its digital capabilities. The Chipotle rewards program now has 21 million members, and 50.1% of revenue in the first quarter came from digital channels. This is remarkable. 

Many of Chipotle's new stores will come equipped with a Chipotlane, the company's drive-thru feature. This has been extremely popular, demonstrated by the fact that stores with Chipotlanes generate 15% higher sales upon opening than ones without, and have greater comps as well. Even better is that this ordering method increases new restaurant sales, margins, and returns. 

The company has been innovating with its menu, too. In January, cauliflower rice was introduced; quesadillas, as a digital-only item, arrived in March. This is a perfect example of how Chipotle is leaning on its technology to drum up hype around new products. 

"We have several market tests of new items scheduled later this year that have shown promise in early-stage consumer testing," CEO Brian Niccol said on the earnings call. Chipotle has done so well with a small and simple menu, so imagine the potential the company has over time as it expands customer choices. 

The chain still has a long way to go based on management's goal of one day operating 6,000 stores. It's not even halfway there yet, which could very well justify its steep forward price-to-earnings ratio of 55. 

The verdict 

If valuation wasn't a concern, Chipotle is the company I'd want to own over the next five years. It's growing faster than Starbucks and still has a long runway ahead of it. Additionally, the company has barely tapped its potential in international markets.  

But valuation does matter, and because of that, Starbucks is the better buy today. It has a long history of strong performance and sells something consumers can't go without. That's a good thing to bet on. 

Neil Patel owns shares of Starbucks. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short July 2021 $120 calls on Starbucks. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$88.35 (-1.17%) $-1.05
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,705.49 (-0.54%) $-9.19

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