Last week, Chipotle Mexican Grill (CMG 0.17%) reported a solid earnings beat for the final quarter of 2021. The fast-casual pioneer also provided an optimistic near-term outlook and said that it is accelerating its expansion pace.
Analysts and investors were very pleased. Chipotle stock leapt 10% higher on Wednesday, the day following the earnings report, before retreating somewhat later in the week. Nevertheless, I'm skeptical that Chipotle stock represents a good long-term investment opportunity at its current price.
Another good quarter
Chipotle's revenue reached $1.96 billion last quarter: up 22% on a 15.2% comparable sales increase. This result roughly lined up with the guidance management provided in October, despite the negative impact of the omicron variant on restaurant traffic in late December.
Meanwhile, adjusted earnings per share (EPS) surged 60% year over year to $5.58, thanks to the restaurant chain's strong revenue growth, higher restaurant-level margins, and a lower-than-usual effective tax rate. This beat the analyst consensus of $5.26.
For the full year, adjusted EPS reached a record $25.42: up from $10.73 in 2020 and -- perhaps more relevantly -- up 81% from $14.05 in 2019.
A solid outlook
Chipotle expects comp sales growth to slow to a single-digit pace in the first quarter. However, that reflects a weak start to the year, as the omicron wave and poor weather caused comp sales growth to slow to around 5% in January. Sales growth should reaccelerate over the next couple of months.
Additionally, management anticipates that Chipotle's underlying margin performance will strengthen during 2022, despite some near-term volatility. Chipotle implemented a roughly 4% price increase toward the end of Q4, putting current menu prices about 10% higher than they were a year ago. That will help the company more than offset the cost inflation it expects in 2022.
Based on the improving unit economics of its restaurants -- particularly those with "Chipotlane" drive-thru pick-up windows -- Chipotle plans to accelerate its annual unit growth pace to around 8% to 10%. The company also now sees room to grow to 7,000 or more restaurants in North America over time, compared to just under 3,000 today. The prior expansion target had been 6,000 units.
A pricey stock
Chipotle stock trades for more than 60 times trailing earnings and 49 times the 2022 analyst EPS consensus of $31.64. That represents a big premium to the broader market.
To be fair, Chipotle stock has nearly always traded at a premium valuation, and it has still performed very well for long-term investors. However, despite the recent increase to its long-term expansion goal, Chipotle has less growth potential than it did five or 10 years ago.
When Chipotle stock peaked above $750 in 2015, the company was on pace to earn about $17 per share that year, making it significantly cheaper than it is today. At that time, annual unit growth was higher, at around 12%. Moreover, Chipotle had fewer than 2,000 restaurants, so reaching the long-term target of 6,000 restaurants in North America implied more than tripling its footprint. Finally, in 2015, Chipotle was developing additional restaurant concepts to expand its growth potential. (It has more or less abandoned that effort in recent years.)
Thus, while Chipotle still has plenty of room to expand, its growth potential is far less extraordinary than it was a few years ago. That makes its lofty earnings multiple somewhat suspect.
Is there enough margin expansion potential?
It would be hard to justify buying Chipotle stock at its current price based on the company's revenue growth potential alone. That said, the stock could still pay off for investors if the company manages to significantly improve its profitability over time.
Restaurant-level operating margin did improve to 22.6% last year, compared to 20.5% in 2019. However, restaurant-level operating margin topped out around 27%-28% in 2014 and most of 2015. Average sales per unit surpassed the 2015 peak last year, but restaurant-level margins remain much lower due to higher labor costs, delivery costs, and other inflationary pressures.
Chipotle certainly has room to continue rebuilding its profit margin over the next few years, but it's not clear how much. As a result, Chipotle stock doesn't look especially attractive at its current price.