Chipotle Mexican Grill (CMG 0.97%) continues building on its strong momentum. The popular fast-casual restaurant chain posted same-store sales and earnings-per-share growth of 26% and 9%, respectively, in the first quarter. More in-person diners and the benefits of digital orders are propelling the business higher.
Investors are most excited, however, about the company's target of one day having 7,000 stores open in North America. CEO Brian Niccol believes that this is a very real possibility.
Image source: Getty Images.
Chipotle's growth opportunity
The Tex-Mex chain opened 51 net new stores in the latest quarter with plans to open 235 to 250 this year. Demand for the company shows no signs of slowing down. In fact, management was so impressed with how well Chipotle has performed in the past couple of years that their 7,000-store goal is actually 1,000 locations higher than the target mentioned during the third-quarter earnings call last year. This figure is also more than double the current global footprint of roughly 3,000 locations.
While most of the restaurant industry was affected by pandemic-related restrictions, Chipotle was able to thrive by leaning on its digital infrastructure. Ongoing investments to bolster its technological capabilities now allow hungry customers to order on the company website, on the mobile app, or through third-party delivery services like Uber Eats or DoorDash. The business counted 28 million rewards members as of March 31.
The booming success of the drive-through option, appropriately called a Chipotlane, proves that by reducing friction and increasing consumer accessibility and convenience, the company's locations are set up to succeed. Even more impressive is that the 7,000-store target doesn't even include Chipotle's opportunity in international markets, where the company operates restaurants in Canada, the U.K., France, and Germany.
Shareholders have a lot to be excited about. Ever since the business's E. coli health scare in 2015, management has righted the ship and positioned Chipotle for massive success going forward.
Chipotle stock is expensive
But even if the company doubled its store count, tripled its sales, and quadrupled its profit by 2030, I still don't think the stock would provide an adequate return for investors. That's because the current price-to-earnings (P/E) ratio of 56 is sure to compress throughout the rest of the decade as the business becomes more mature. Consequently, further growth opportunities will be limited as key markets saturate.
Trading at a P/E of about 20, Starbucks is an apt example of the multiple Chipotle could carry in 2030. At this valuation, and based on the financial projections I just discussed above, the fast-casual pioneer would only produce an annualized return of 5% by the end of this decade.
Therefore, it's evident the optimism surrounding Chipotle, which is a wonderful business, is fully priced in. Investors would be smart to adopt a wait-and-see approach here, being ready to buy shares if the valuation becomes more palatable.
