It can be gut-wrenching when the stock market takes a hit. Red in your portfolio to start the year is never a welcome sight. But for investors with a long-term mindset, these moments of weakness can be lucrative opportunities to purchase shares in wonderful businesses at a discount.
Despite headwinds from soaring inflation, the coronavirus omicron variant, and labor shortages, Chipotle's results in its most recent quarter (ended March 31) show continued business strength. Same-store sales jumped 9% year over year, and the business opened 51 new restaurants during the three-month period.
Unsurprisingly, Chipotle's restaurant-level operating margin shrank from 22.3% in Q1 2021 to 20.7% in the just-reported quarter. Higher costs for beef, avocados, and paper are to blame. However, thanks to the company's ability to raise menu prices, the negative impact was somewhat mitigated.
If the strong sales trends continue, management forecasts same-store sales will grow 10% to 12% in the current quarter. And for the full year, Chipotle is expected to add 235 to 250 new restaurants to its store footprint.
"Our investments in our people, coupled with our digital system and commitment to culinary driven by Food With Integrity resulted in serving more guests at our restaurants with excellence," Brian Niccol, Chipotle's chairman and CEO, highlighted in the press release.
What makes Chipotle stand out in the crowded and intensely competitive restaurant industry is its focus on the digital experience. Launched in March of 2019, Chipotle's rewards program now counts an incredible 28 million members. These loyal customers can use the company's mobile app or website to place an order for pickup or delivery, increasing accessibility and convenience. With each purchase, customers earn points that they can use for free food, merchandise, or even charitable donations.
Of those previously mentioned 51 stores that opened last quarter, 42 were built with a Chipotlane, the company's popular drive-thru option. These increase new restaurant sales, margins, and returns, and they provide a new pillar of growth. In the latest quarter, 41.9% of food and beverage revenue came from the digital channel.
It's not a stretch to say that Chipotle's competitive position strengthened over the course of the past two years, which was a tumultuous time for most other restaurants. Being available to hungry customers in ways most convenient for them certainly helped bolster Chipotle's mindshare.
Looking ahead, the business is finding new ways to innovate and engage with the younger demographic. Chipotle is making a push in the metaverse by partnering with Roblox to allow players to earn in-game currency that can be exchanged for food in the real world. It's just another example of how Chipotle is thinking creatively in an otherwise boring and slow-changing industry.
While Chipotle is clearly an outstanding company that should be on investors' radars, its valuation today gives me pause. The stock is down 18% in 2022 (as of April 26), but its price-to-earnings ratio of 63 remains elevated, even if the company does have solid growth prospects.
Because everyone is aware of just how superb a business Chipotle has proven to be over the past few years, its bright future is fully priced into the stock right now. Therefore, I don't see a predictable path to generating market-beating returns by buying shares today, as there is no margin of safety.
If the broader stock market, and growth stocks in particular, continue taking a hit in the near term, investors could be presented with a fantastic opportunity to scoop up shares in this high-quality restaurant business. Patience is currently a virtue with Chipotle's stock.