Chipotle Mexican Grill (CMG +2.35%) investors have been on edge since the announcement of the departure of powerhouse CEO Brian Niccol in August. The stock fell after its split in June, and it's tentatively making its way back up as investors get comfortable with the idea that the chain can go on even without Niccol leading the way.
If the market had any more quibbles with that notion, the company just made it clear that it's not stepping away from its strong leading position in the fast-casual restaurant space, flashing a bright buy signal to investors.
The unstoppable burrito king
Chipotle has become the go-to spot for reasonably priced fast-casual fare. It promotes itself as having fresh, healthy food, and it innovates with its menu to stay on top of trends.
It attracts an affluent clientele that's more resilient despite inflation, and it has done well under the most adverse circumstances. It's one of a few restaurant chains that didn't miss a beat during the pandemic, without even one quarter of sales declines or losses.
In the 2024 second quarter, sales were up 18.2% year over year, driven by an 11.1% increase in comparable-restaurant sales. Operating margin expanded from 17.2% to 19.7%, and earnings per share (EPS) were up from $0.25 last year to $0.33 this year. That might have been somewhat inflated by stock-split hype, but it wasn't an unusual quarter for the company.
It's still opening up new stores at a fast clip, with 52 in the quarter and about 285 expected for the full year. It plans to reach about 7,000 in North America, up from around 3,500 today, giving it plenty of years of growth from new stores alone, but it's starting to look into international markets as well.
What Chipotle is up to
Chipotle wasn't always this successful. It was dealing with some major fallout after E-coli was discovered in its restaurants, and Niccol was brought in to turn things around.
The question on investors' minds has been whether or not it can keep up its success without its leader. Niccol is a star at developing working processes and creating team leaders out of management. He also knows how to cultivate a brand and market it.
Now that he has infused this culture into the company at all levels, the likelihood is that the new management, under interim CEO and former chief operating officer Scott Boatwright, will keep things moving along. So far, Chipotle has not brought in outsiders; it's letting the insiders steer the ship, and that certainly looks like the right move. It doesn't need a new brand.
NYSE: CMG
Key Data Points
Last week, the company made some announcements that should inspire confidence in the new management. It launched a fund called Cultivate Next in 2022 to invest in companies that align with its vision of creating a better world and helping further its goal of 7,000 stores. Through this fund, it's now investing in two new concepts.
The first is an Australia-based supply chain platform called Lumachain that uses artificial intelligence (AI) to trace products as they move through the supply chain from farm to store in real time.
The second is a fast-casual dining concept called Brassica that's focused on Eastern Mediterranean food. It's like a Chipotle with a different spin, reminiscent of Cava. It has only six stores right now, but with Chipotle's resources and by following its proven model, that could seriously expand.
Does this point to new directions for Chipotle? Not right now, but it could certainly pull some tricks like that out of its sleeve. If it goes well, the chain has the funds and opportunities to reach into many different concepts that could expand its potential and achieve an even longer growth runway.
Cultivate Next has already invested in several other programs, and this could be an incubator for serious growth initiatives in tech, AI, and restaurant concepts. Chipotle stock jumped on the news.
You won't get a deal on this stock
Chipotle's price-to-earnings ratio (P/E) has been rich for a long time, and you might have already missed the chance to buy it on the cheap. Even that's relative: The P/E hadn't dipped below 48 even at the recent low. However, now it's back up to 58.
That speaks to investor confidence in Chipotle stock. With Niccol or not, Chipotle has an excellent, reliable growth model that has returned incredible gains for investors in the past. New management is showing its strength and its willingness to be bold in the signature Chipotle fashion, and the company is in a good position to keep creating shareholder value well into the future.
