Chipotle Mexican Grill (CMG +0.03%) is a growth stock with management that is keenly focused on expanding the company's top line. There are two ways for a restaurant chain to do that, and the leadership team is focused on both of them. Here's what you need to watch at Chipotle over the next three years to make sure that the company is living up to its own plans.
Chipotle has five goals, but really only two
In Chipotle Mexican Grill's 10-K, there is a section titled "Business Strategy," in which it explains that it has five fundamental goals:
Sustaining world class people leadership by developing and retaining diverse talent at every level;
Running successful restaurants with a people accountable culture that provides great Food with Integrity while delivering exceptional in-restaurant and digital experiences;
Making the brand visible, relevant, and loved to improve overall guest engagement;
Amplifying technology and innovation to drive growth and productivity at our restaurants, support centers and in our supply chain; and
Expanding access and convenience by accelerating new restaurant openings in North America and internationally.
Those are all important, but they really can be distilled down into just two main objectives: run the existing restaurant fleet at a high level and open new locations. The first quarter of 2024 showed that Chipotle is capable of doing both quite well.
With regard to existing restaurants, same-store sales, which measures sales at locations open for at least a year, expanded at a roughly 7% clip. Half that level would be considered a pretty good result in the restaurant business, so whatever Chipotle's is doing with its brand concept is clearly resonating with customers.
Meanwhile, overall sales rose a touch over 14% to $2.7 billion. The only way that number gets significantly larger than same-store sales is by adding new locations. So, based on the numbers, Chipotle is firing on all cylinders today.
NYSE: CMG
Key Data Points
What about the future for Chipotle?
Chipotle currently operates around 3,500 restaurants globally. That's a pretty big number, but it is nowhere near as large as other brands with which it competes. For example, McDonald's has more than 41,000 locations around the world. To be fair, McDonald's is one of the largest restaurant companies on Earth, but it still suggests there's a huge runway for growth ahead. A more comparable brand might be Taco Bell, owned by Yum! Brands, which has around 8,500 locations and sales of nearly $16 billion.
So it looks like Chipotle could add another 5,000 stores at the low end. Its revenue, annualizing the first-quarter tally, would be somewhere near $11 billion today. That's about $5 billion lower than Yum! Brands' Taco Bell. Even if Chipotle never reaches the scale of McDonald's, the next three, five, and even 10 years are likely to be filled with growth. It's worth noting the company only opened 47 new locations in the first quarter. That's a pace of roughly 200 a year, which means that it would require well more than a decade to get to Taco Bell's scale.
There's no way for Chipotle to instantly reach the size of Taco Bell or McDonald's. It has to build that growth from the ground up while still executing well at its existing restaurants. That's not an easy task, and there are going to be bumps in the road along the way. Put another way, don't expect every quarter to be as good as Q1 2024.
But the next three years will still likely produce a lot of growth in the business. Perhaps the company "only" gets to 4,100 locations in that time, but that's still going to have a meaningful impact on the top and bottom lines. If you are considering investing in Chipotle today, well, very little has changed about its long-term growth story.
Paying up for growth at Chipotle
The problem with Chipotle is that Wall Street is well aware of its strong growth story. Looking at the most commonly used valuation metric, the stock's price-to-earnings (P/E) ratio is 63.5 versus a five-year average of 69.5. You can argue that P/E being below the long-term average suggests shares are cheap, but it is hard to call 63.5 a low number.
You are paying a premium for growth at Chipotle, which means this stock is most appropriate for more aggressive investors. Still, if history is any guide, Chipotle knows how to deliver what investors are expecting.
