Chipotle Mexican Grill (CMG +0.91%) finally executed its much-anticipated 50-for-1 stock split last month. The fast-casual pioneer saw its stock price rise to well over $3,000 before the split, ultimately deciding that reducing the stock price was necessary.
NYSE: CMG
Key Data Points
Chipotle joins a growing list of companies deciding to split, and splits have become popular again after years of falling out of favor. Why?
There are a few factors that go into a decision like this (including some involving how stock options are awarded to employees and how they exercise those options). I think the rise of the retail trader probably has some influence in the decision. Retail traders have become a substantial part of the market that companies can't ignore. A record was set back in February when the average retail volume per day hit $1.5 billion. A split allows for more access to a wider range of this growing segment.
With the split executed, what's next for Chipotle? Investors are looking to the company's next earnings report, eagerly awaiting numbers for Q2. Let's take a look at what to pay attention to before their release on July 24.
Look beyond revenue to comparable sales
The burrito maker's strong revenue growth is impressive, no doubt. Sure, it's not as mind-blowing as some tech stocks can deliver, but double-digit growth sustained over years in the quick service restaurant (QSR) industry isn't easy to achieve. Look at the chart showing Chipotle's compared to McDonald's over the past three years.
MCD Revenue (Quarterly) data by YCharts
And it's been able to deliver this while becoming more efficient, raising its margins significantly each year.
MCD Profit Margin data by YCharts
But the number I'm most interested in is its comparable sales growth. This is the growth in sales within a single store year after year, instead of the entire company's bottom line.
Why is this different? Chipotle is opening stores left and right, driving new revenue growth from an increase in physical locations. Could consumers be turned off by Chipotle's premium price tag? That would more readily show itself in poor comparable sales while remaining masked in overall revenue growth.
Q1 revealed 7% comparable sales growth year over year. This is respectable and in line with past quarters. A sharp drop held over multiple quarters could spell trouble for the company, however, so pay attention to the upcoming report.
Restaurant openings keep marching on, and it looks like the company will too
In looking at comparable sales, I don't mean to imply that top-line revenue growth isn't important or that opening locations isn't a perfectly legitimate way to grow your business -- far from it. It's the primary way for many businesses.
Chipotle is opening stores rapidly, with 47 additions last quarter, and has plans to continue at this rate for some time. I think Chipotle still has a long way to grow through location expansion before it reaches saturation, even here in North America, where most of its stores are located. There is a massive untapped global market waiting for it after North America sees its fill. That's a lot of opportunity for revenue growth.
In addition to opening new stores, the company has been innovating store design. Most new restaurants include a "Chipotlane" now. In fact, 45 of the 47 it opened last quarter included one.
Introduced in 2018, this is a simple but effective upgrade that moves all digital order pickups outside through a drive-thru window. Whether through Chipotle's own or a third-party app like DoorDash, mobile orders are a major way consumers purchase fast food now. By separating pickups from in-store orders, the location is more efficient and can serve more customers.
Chipotle is trading at quite a premium compared to others in its industry. It's in the realm of growth tech stocks. This does make me pause, but ultimately, I think the company can continue growing revenue by double digits well into the future. Therefore, it's mostly justified.
