There are few guarantees in the stock market, but one thing you can count on is growth at Chipotle Mexican Grill (CMG 2.41%). The Tex-Mex specialist has a recipe that investors can savor, and it features ingredients like restaurant openings, comparable-store (comps) sales increases, and high profitability.
However, its stock is already up 59% in 2023, and it trades at a high valuation. Can it go any higher?
More heat than a jalapeño
Chipotle has been on a hot streak for most of its two decades as a public company. It managed to grow revenue and stay profitable throughout the pandemic era save for one quarter, and has continued to demonstrate strong performance despite inflation.
Revenue increased 17% over last year in the 2023 first quarter, with comps up 11%. Operating margin rose from 9.4% last year to 15.5% this year, and earnings per share increased from $5.70 to $10.50.
There are several ways Chipotle stands out that have contributed to its success. One is its mid-level pricing.
Chipotle is a favorite of the young and affluent, who have more disposable income in rough times when others are cutting back. At the same time, it's a step up for less-affluent folks to splurge on little luxuries like a special event, as opposed to truly expensive fare. This means it draws from various markets even in this inflationary period.
Another is Chipotle's focus on omnichannel revenue. Digital sales soared when people were at home, but they remain at elevated levels and accounted for 39% of the total in the first quarter.
At the same time, people continue to get out and spend on leisure activity, and in-store sales were the faster-growing segment in the quarter, increasing 22% over last year.
The profitability in the quarter was impressive, and much of it came from price increases. That speaks to the restaurant chain's brand and pricing power.
Exploding with flavor
That's all in the past, so let's see what the future holds. Management thinks it can more than double its restaurant count from 3,200 to 7,000. Since it's already well represented in many big cities, Chipotle recently said it's pivoting to opening them in smaller cities and internationally.
The company plans to open 255 stores this year and is targeting an opening rate of 8% to 10% annually, with 80% having a drive-thru, what it calls a Chipotlane.
Chipotle owns all of its restaurants, including about 60 outside of the U.S. Recently, however, the company announced a partnership with a franchise operator in the Middle East to open stores in Kuwait and Dubai.
This should be an interesting development to watch, and it could lead to a long growth runway. Franchised businesses contribute to wider gross margins, since much of the store costs are incurred by the operator. Investors cheered the news, pushing Chipotle stock higher.
Not too hot to handle
As an impartial voice, I'll mention what to look out for as well. First, inflation continues to be a problem in the global economy, and many companies that were managing are beginning to show wear. There's only so much pricing power a company can have before customers cut back and prices get too high.
Next, some of its markets are saturated, so while there's ample growth opportunity, Chipotle will have to work hard to generate comps increases.
Lastly, we get to valuation. The stock trades at a premium: about 58 times trailing-12-month earnings at the current price. Lest you think that's too hot to handle, it's actually well below the three-year and five-year averages of more than 80.
Chipotle routinely trades at an expensive valuation because its prospects are so strong. If you wait for a better time to buy, it might get you a few points lower in the price-to-earnings ratio, but don't expect any bargains on this stock.
I would say the opposite: As high as Chipotle is right now, it can go much, much higher. You can't time the market, so wait for a pullback if you please, but now is as good a time to buy as any if you are planning to hold for the long term.
Chipotle reports second-quarter earnings soon, and if they're tasty, its stock should rise even in the short term.
