Chipotle Mexican Grill (NYSE:CMG) has been one of the most successful restaurant concepts in recent memory, having pioneered the fast-casual category by serving up burritos, bowls, and tacos using real ingredients in a sustainable way. Sales have more than tripled since 2010, while total store count increased from 1,095 a decade ago to 2,803 as of the first quarter of 2021.
But CEO Brian Niccol is confident the company still has a long way to go. His comments at the recent Piper Sandler Consumer Marketplace Conference should definitely garner the attention of shareholders. Read on to find out what he said and what exactly it means for investors.
The outlook gets better
Niccol mentioned Chipotle is now "going to start talking about $3 million, $3.5 million AUVs (annual unit volumes)." This is up meaningfully from a previous AUV target of $2.5 million, which he highlighted as recently as the first-quarter 2021 earnings call in April.
The confidence to raise the bar even higher stems from Chipotle's massive digital success during the pandemic. In each of the last four quarters, sales via digital channels more than doubled with the second and third quarters of 2020 growing in excess of 200%. Chipotle now counts 21 million rewards members, quite the accomplishment given the program was launched just over two years ago.
Management believes the return of dine-in eating will not cannibalize digital revenue. This thinking certainly supports the rosy sales outlook, as only an estimated 10% to 15% of customers actually both dine in and order online.
The opportunity to make a bigger push in international markets could boost the company's prospects as well. There are currently 24 locations in Canada, but there's potential for a "few hundred." Furthermore, expansion into Europe (Chipotle has 11 stores in the U.K. today) could drive unit growth as well.
Generating greater volume from each location is the bread and butter for any retail operation. The primary method of creating value is growing sales per square foot, so to hear the CEO forecast a higher target for this metric is a positive development for Chipotle shareholders.
But valuation matters
Using the ambitious new target of $3.5 million in annual unit volume allows us to produce a ballpark estimate of the company's value over the long term, which we can then use to decide if Chipotle stock makes a good investment today. Even if the company has 6,000 locations (reiterated by Niccol as a long-term goal on the earnings call) in 10 years, which equates to 320 openings per year, annual revenue in 2031 would total about $21 billion.
Chipotle's net profit margin in the years before the E. coli outbreak in 2015 hovered around 10%, but it has since fallen due to higher food and safety costs. With greater volume and subsequent operating leverage, even if net margin rises to 12% over time, annual earnings in a decade will approximate $2.5 billion. Based on the company's current market capitalization of $44 billion, Chipotle today trades at 18 times its estimated 2031 net income.
In 10 years' time, let's say the stock carries a forward earnings multiple of 38. This is what Starbucks, at this point a mature food and beverage giant, trades at as of this writing. This would result in a modest compound annual return of just 8% over the next decade. And remember, this is in a best-case scenario where Chipotle opens more stores per year than it ever has and achieves a profit margin it never has before.
Additionally, at that point, it's reasonable to assume Chipotle will be a more mature company without the same level of growth prospects it has now, so the multiple could very well be lower than the 38 I used in this scenario. For comparison's sake, the stock currently trades at a whopping forward price-to-earnings ratio of 64.
Of course, the company could continue executing beyond expectations, and Niccol could keep raising that AUV target, but even so, there appears to be no margin of safety inherent in the stock price today. Given the company's current valuation, it would be difficult to achieve market-beating returns over the next decade even if you truly believed in the best-case assumptions.
For outside investors wanting to get in on this fast-casual leader, it's best to wait for a meaningful pullback before you even think of purchasing shares.