During the fourth quarter of 2021, Chipotle Mexican Grill (CMG 0.86%) grew same-store sales 15.2% and increased adjusted earnings per share 60.3% compared to the prior-year period, both of which exceeded Wall Street's estimates. The business was able to lean on price increases and its top-notch digital infrastructure to help offset rising food and labor costs, which are plaguing the entire industry.
Because of these positive results, shares in this booming Tex-Mex chain were up 10% on Feb. 9, the day after earnings were announced.
But perhaps the most important piece of information that stood out was management's heightened optimism surrounding the long-term outlook for Chipotle. Continue reading to learn exactly what it means and whether it makes the stock a buy.
Chipotle is a thriving restaurant chain
After opening 78 new locations during the fourth quarter, Chipotle had a total of 2,966 stores at the end of 2021. However, the growth story is far from over.
"I'm excited to share that over the long term, we now believe we can operate at least 7,000 Chipotle restaurants in North America, up from our prior goal of 6,000," CEO Brian Niccol said on the fourth-quarter earnings call. According to this comment, there's still a huge expansion opportunity for this top restaurant stock.
The upgraded outlook is a direct result of Chipotle seeing remarkable success from its small-town stores, which are in markets with a population as low as 40,000 people. The business can take advantage of cheaper leases in these areas while at the same time leveraging its national advertising spend that already raises brand awareness.
Lower operating costs, coupled with pricing power, lead to better cash-on-cash returns for Chipotle stores. Due to these improving economics, management is building a robust development pipeline that allows for unit growth to reach an annual rate of 8% to 10%.
And the burgeoning success of the company's drive-thru option, known as Chipotlanes, also boosts restaurant-level sales, margins, and returns. According to the leadership team, more than 80% of new restaurants will come equipped with Chipotlanes.
Management plans to continue testing alternative store formats to grow the company's total addressable market. At the end of the day, it's all about expanding access and convenience for customers.
But the stock is still expensive
Even with the potential for 7,000 North American locations, I still don't believe Chipotle stock is a smart buy right now. It trades at a price-to-earnings ratio of 70, which doesn't provide investors with any margin of safety. That valuation multiple is more than double larger (and admittedly slower-growing) industry competitors like McDonald's and Starbucks.
I previously wrote about how the stock is overvalued. My argument was based on the fact that even if Chipotle was to aggressively open new stores at an annual rate that it hadn't achieved before, the chance of posting market-beating returns was extremely slim. Adding 1,000 locations to the long-term store target certainly helps Chipotle's investment case, but even then, I think the stock is too pricey.
Sure, this doesn't incorporate international growth, especially in Europe, or the possibility of management raising the expansion outlook again, both of which would obviously add upside to the stock. But these factors are hard to predict and quantify, and therefore shouldn't be incorporated into the current investment thesis.
Without a question, Chipotle's business got stronger over the past couple years. And despite ongoing inflationary pressures and labor issues, the company is firing on all cylinders. However, it's best to exercise patience before adding this top restaurant stock to your portfolio.