The COVID-19 pandemic, which crushed the restaurant industry, didn't really bother Chipotle Mexican Grill (CMG 2.41%). After that major health crisis began to cool off, above-normal inflation and an uncertain economic environment still aren't doing much to derail the business.
Chipotle stock's performance reflects this. It's up more than 50% in 2023, and 100% in the last three years, crushing the S&P 500 and the Nasdaq Composite Index. Investors might rush to take a huge bite out of this stock.
Here are three obvious reasons you might want to buy Chipotle shares. However, there's one thing that must happen to this top restaurant stock before you do.
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Chipotle expands its physical footprint
Chipotle's $2.4 billion revenue in the first three months of 2023 was 71% higher than the company's sales in first-quarter 2020. And in recent quarters, when many businesses struggled with slowing demand as people tried to stretch their budgets, Chipotle keeps posting double-digit revenue gains like clockwork.
Key to this impressive growth is its ever-expanding store footprint. Chipotle opened 236 new stores in 2022, and another 41 in the first quarter. The business now has 3,224 locations. But the leadership team, led by CEO Brian Niccol, believes that the chain can one day have more than 7,000 stores in North America.
Moreover, Chipotle has done a good job of boosting same-store sales, which measures the revenue growth of restaurants open at least 13 months. Same-store sales jumped 11% during Q1, and management believes this metric will rise mid- to high-single digits for the full year of 2023.
Chipotle has proven pricing power
Inflation has been pushing up costs for companies of all shapes and sizes. In Chipotle's case, it had to pay higher prices for things like avocados, dairy and paper products, and beef during 2022. While these pressures have abated somewhat, it's encouraging to know that the business has been able to raise its menu prices on multiple occasions to combat the effects of inflation. Legendary investor Warren Buffett believes that pricing power is the true sign of a wonderful business.
This is clearly showing up in the financials. Chipotle's operating margin was 15.5% during Q1, up from 9.4% in the year-ago period. This helped drive net income growth of 85%, much faster than the revenue gain.
Besides operational improvements and pricing power, Chipotle's margins have been boosted by the aggressive opening of Chipotlanes, the popular drive-through option designed for pick-ups of digital orders. Locations fitted with a Chipotlane produce better new store sales, margins, and returns.
An extra side of technology
Taking a page straight out of Starbucks' playbook, Chipotle has leaned heavily on technology to better engage its customers. Launched in March 2019, Chipotle's rewards program has amassed 33 million members. These customers can order ahead of time for pick-up or delivery, while earning points that can be redeemed for free food.
From the company's perspective, it's not only a valuable tool for the collection of data, but it can provide a direct method of communication to engage customers.
And they certainly seem to appreciate the convenience of the mobile app. In 2022, 39% of overall company revenue came from digital channels. Because these orders are generally higher-margin than in-store orders, Chipotle's bottom line benefits tremendously.
Consider the valuation
While Chipotle's impressive growth, improving profitability, and focus on bolstering its technological capabilities are all compelling reasons to want to buy the stock, investors should stop and think twice.
This company has been a huge winner over the years, and its stock price reflects this. As of June 28, shares trade at a price-to-earnings ratio of 57. That's not cheap by any means, and it might signal the lack of a margin of safety for investors.
If you care more about the company's favorable qualitative characteristics than its expensive valuation, then the stock is a worthy addition to your portfolio. But if you're someone who prioritizes the price you pay for a stock, then it's best to wait for a meaningful pullback before buying shares.
