Spiderman, Superman, and Wolverine are all popular comic book superhero characters. Wolverine, in particular, has a unique storyline where his existing healing factor mutant ability allowed him to survive the deadly adamantium transformation and become nearly indestructible. Wolverine is a one-of-a-kind character within the Marvel Universe.
Similarly, Chipotle (CMG 0.17%) is unique within the fast food industry, with a storyline that has never been seen or duplicated, and probably never will. Like Wolverine, there probably won't be another Chipotle – but there doesn't necessarily need to be either.
Burrito bowl origins
Chipotle is the perfect example of being in the right place at the right time – just on a much larger scale. Its 14 initial restaurants were all in Colorado when McDonald's became a majority investor. At one point, McDonald's increased its ownership of the chain to 90%, or $360 million, before complete divestiture.
By Astronautic81 (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], via Wikimedia Commons
Even before going public in 2006, Chipotle's 2005 Annual Report foreshadowed what growth would be like for years to come. Chipotle went from a loss of $24 million in 2001 to a gain of nearly $38 million in 2005 .
Recent 2013 third quarter earnings show that even a mature brand like Chipotle still has plenty of room to grow. Revenue for the first nine months of the year grew 16.7% to $2.37 billion with net income rising 14.4% to $247.8 million. Additionally, the chain opened another 129 new restaurants.
However, since Chipotle is now near all-time highs surging past $520/share, there may be better stock opportunities elsewhere within the fast food industry.
Another superhero in the making?
One of the biggest drawbacks to becoming a new restaurant IPO in the past couple of years has been the inevitable comparisons to Chipotle. Potbelly (PBPB 1.88%) has suffered criticism from analysts about its lack of growth potential, but analysts may be missing some key similarities.
First, 85 of Potbelly's 286 domestic locations are in Illinois (similar to Chipotle's Colorado beginnings) and it has no locations in either California or Florida . Secondly, despite revenue not soaring at the rate of an early Chipotle, it is growing. Potbelly had positive comparable store sales growth in 12 of the last 13 quarters, and restaurant locations continue to be built.
Lastly, Potbelly currently has an $800 million market cap. If you consider that one of its closest competitors, Subway, generates over $11 billion in sales annually , then Potbelly potentially has plenty of room to grow as a company and in its stock price.
A veteran rising in the shadows
Rising under-the-radar, year to date Wendy's (WEN -0.10%) has actually outperformed Chipotle: 84% versus 73%.
The catalyst to this comeback story was mainly from a successful 2013 second quarter earnings news release. First, the sale of 425 company-owned restaurants to franchisees willing to pay for remodeling killed two birds with one stone. The chain is now able to modernize restaurant buildings that have been aging, while also reducing overhead costs. Additionally, Wendy's raised its dividend by 25%.
Another key development for Wendy's was taking the No. 2 spot among hamburger-oriented chains by passing Burger King last year with $8.5 billion in 2011 sales, according to Technomic estimates . Technomic figures are based on systemwide sales at franchise and company-owned restaurants.
Wendy's remaining 18.5% investment in Arby's after its 2011 sale may prove to be an asset for years to come. This investment allows Wendy's to benefit from Arby's future successes. Recently, Arby's announced an initiative to generate new menu ideas through its own employees. This business tool has been successful among top companies, for instance in 2012 for Southwest Airlines and this past summer for Apple .
By David Hoshor from Stow, Ohio, USA (Flickr) [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons
Frying oil is typically the largest cost component in a frying program, and advancements are being made within the industry to maximize its useful life. Less frying oil means increased profits. One key takeaway is that improving frying oil methods will not benefit healthier fast-casual chains like Chipotle as much due to obvious menu differences. Add the popularity of the Pretzel Bacon Cheeseburger, and Wendy's may be sizzling on the income statements in future quarters.
Bottom Line
Chipotle is a superheroic restaurant chain. However, its recent stock surge may not make it as attractive of an investment. Potbelly still has to prove itself, but it has plenty of room to expand domestically. The chain is nowhere near market saturation with approximately 300 locations worldwide. Wendy's is surprising investors, analysts, and competitors as it seemingly has found a way to get out of its multi-year rut. It is likely that there will never be another Chipotle. However, people will always need to eat. Potbelly and Wendy's are viable options to become the next superhero restaurant chains.
