Editor's note: A previous version of this article overstated the net income per employee for Chipotle. The Fool regrets the error.
There has been a lot of spicy talk lately about Chipotle's (NYSE: CMG) record-high stock price. Many say the stock is overvalued and due for a correction. But with continued strong growth prospects in both domestic and international markets, Chipotle is just getting going.
Room for more beef in the taco
Chipotle's growth in recent years has been meteoric, and there are good reasons to expect that this will only continue. The rate at which sales at Chipotle's existing stores grew -- known as comparable sales increase -- has risen impressively over the past three years, with steadier and stronger growth than McDonald's (NYSE: MCD) and Panera Bread(Nasdaq: PNRA). Check out the table below for the specific numbers. Chipotle acknowledges that it will likely see a slowdown in 2012 due to overall economic factors, but the underlying, Chipotle-specific reasons for this growth (higher traffic, price increases) remain steady.
|
Metric |
CMG |
MCD |
PNRA |
|---|---|---|---|
| P/E | 61.23 | 18.54 | 34.68 |
| Comparable sales growth 2011 | 11.2% | 5.6% | 4.9% |
| Comparable sales growth 2010 | 9.4% | 5.0% | 7.5% |
| Comparable sales growth 2009 | 2.2% | 3.8% | 2.4% |
Source: Companies' annual reports; Fool.com.
Note that Chipotle's comparable sales growth numbers come from company-operated restaurants only, as it does not franchise its restaurants. Panera's numbers represent just company-owned locations. McDonald's does not break out comparable sales growth figures for franchisees.
Chipotle's price-to-earnings ratio is well above those of McDonald's and Panera Bread. For further comparison, the industry average is currently about 25.8. Still, we should always put this number in context. Not only do we see robust, organic growth at Chipotle, but also marvelous efficiency. The company's net income per employee is orders of magnitude above the competition.
Plenty more notches in the belt
In pursuit of further expansion, Chipotle has begun to implement its "A Model" concept for new domestic restaurant openings. Chipotle's initial growth came from opening stores in dense, urban markets. While these markets are not yet saturated, the options for further such expansion are increasingly limited. Under the A Model strategy, Chipotle opens simpler, more streamlined restaurants in areas with attractive customer bases but less foot traffic. These restaurants are cheaper to build and maintain, and allow Chipotle access to broader areas.
But Chipotle is not resting on its lettuce-flavored laurels, and has introduced its promising ShopHouse concept. After all, Chipotle's business is not just burritos. Chipotle provides a great process that can be applied to various cuisines. ShopHouse extends Chipotle's concept to Southeast Asian food. The first ShopHouse restaurant opened in Washington, D.C., in 2011, and it has been wildly successful. The Washington Post's top food critic gave ShopHouse rave reviews, and customer comments on Yelp! are almost religiously fervent.
While Chipotle is coy about expansion plans, the ShopHouse concept elegantly solves one of Chipotle's problems: cannibalization. No, this is not a Soylent Green story. When Chipotle opens new stores in a market in which it already operates, it can erode sales for established stores. ShopHouse offers a wholly different cuisine, which should minimize this effect.
Internationally, Chipotle's two new London locations seem to be quite successful, and Londoners have embraced Chipotle's burritos. Chipotle does not break out revenue figures for individual stores, but online reviews and blogs across London are consistently favorable. (The company dryly says the stores are "making money and are accretive to company earnings.")
Chipotle has plans for a Paris opening as well, although it has been repeatedly delayed. This only seems to have heightened Parisians' enthusiasm, and there are entire blogs devoted to nothing more than speculation and rabid anticipation of the opening date.
Further east, Chipotle is looking for sites in Munich, which I predict would be a brilliant move. In my experience, there is no good Mexican food in the entirety of Europe, so Chipotle doesn't have much of a bar to clear.
Where the fat could get trimmed
That which is "sustainable" and "natural" in the U.S. is just "the law" in Europe. For instance, many European jurisdictions already outlaw the use of rBGH (recombinant bovine growth hormone) in cattle and nontherapeutic antibiotic use in livestock operations, two of Chipotle's selling points in the U.S. market. This could erode brand differentiation in Europe unless Chipotle raises the bar. The flip side, of course, is that this considerably eases supply constraints. Meanwhile, the simple fact of providing decent Mexican food in the land of execrable Mexican food may be differentiation enough.
There is also the creeping opposition that Chipotle, despite its healthy-food cred, grossly overportions its burritos, thus making them less healthy meal choices. If consumer home in on this, they could change their tune about whether Chipotle's food lives up to its "Food With Integrity" mantra. Ultimately, though, if you consider Chipotle's international growth potential, coupled with its success abroad, and the fact that its model is highly efficient and doesn't require much tailoring for European requirements, I'd say it isn't overpriced at today's multiples.
Go for the whole enchilada
It's true, Chipotle is expensive. I'm going to buy shares anyway, and I've made an outperform call in Motley Fool CAPS. This company has every reason in the world to keep growing, and I don't want to miss out on that. To help it along, I plan to contribute substantively and frequently to the company's sales, because those burritos are just so delicious.
