What happened

Shares of Chipotle Mexican Grill (CMG 2.41%) soared over 54% in the first half of 2023, according to data provided by S&P Global Market Intelligence. The Mexican food chain that defined the fast-casual category posted another burst of strong earnings growth in the first half of 2023 and seems to benefit from cooling food and wage inflation. Shares of the stock are now up over 4,500% since going public in the early 2000s.

Chipotle stock is also getting a boost from broad market returns so far in 2023. The S&P 500 -- as of this writing on July 10 -- is up 15.3% year-to-date (YTD).

So what

In its Q1 earnings report covering the first three months of 2023, Chipotle showed strong growth as we continue to recover from the worst of the COVID-19 pandemic. Revenue grew 17% year over year to reach $2.4 billion, driven primarily by same-store sales growth of 10.9%. Same-store sales are defined as revenue growth from already opened restaurants and mean that Chipotle would have grown revenue by more than 10% even if it didn't open any new locations.

But what's even more impressive is Chipotle's consistent margin expansion. Last quarter, the company's operating margin was 15.5%, up significantly from 9.4% in the year-ago period. This has been driven by higher store-level margins, which hit an impressive 25.6% in Q1. 

Why are margins expanding? For one, Chipotle has implemented some price increases over the last few years, which doesn't seem to limit customer demand. Second, inflation on its food inputs has stalled. For example, the price of avocados -- a key ingredient for Chipotle -- has declined significantly in recent quarters after the post-pandemic supply shocks. Wage growth is also slowing down, which has been a key headwind affecting retail locations like restaurants since 2020. Lower input costs and higher selling prices is an easy equation for rising profit margins.

Now what

The key question for Chipotle is: where will profit margins land once the business hits a more mature state? Historically, the company has hit operating margins closer to 17%, but has never breached the 20% level for a full 12-month period. If making a conservative projection, investors should probably assume that margins won't creep too much past the high teens level even as Chipotle grows much larger. 

Over the long term, Chipotle thinks it can open 7,000 locations across the United States, which would be more than double its current count of 3,200 stores. Compared to its current revenue base of $9 billion, it wouldn't be shocking to see Chipotle hit $25 billion in annual sales once it reaches this ambitious store target if it can also consistently grow its revenue at each location. At 17% operating margins, that would work out to $4.25 billion in annual operating income.