Restaurant growth stories offer investors some of the market's most promising investment opportunities. Naturally Starbucks (NASDAQ:SBUX) can be singled out as one of the restaurants best growth stories over the years as the company has expanded to close to 20,000 locations today when it only had 3,501 locations in 2000. Today many investors want to jump in on the next big thing and hope to catch the wave of a similar return over a multi-year period.
In a sweet spot for growth
Chipotle Mexican Grill (NYSE:CMG) generates some of the most attractive returns in the restaurant industry. The company has one of the best-in-class store volumes, generating an average of $2.1 million in sales per unit, which results in a 27% store margin. Investment costs are modest relative to revenue -- less than $1 million on a cash basis.
Part of the low cost of opening a new unit is due to the lack of necessary inventory, as well as the plain look of the restaurants. Additionally, restaurants use a format where food is cooked in advance and a production line is formed at extremely high traffic areas so that all food resources during peak volume hours are dedicated to throughput and higher sales.
Chipotle Mexican Grill's business model supports a long-term outlook for sustained unit growth. Within many of the country's major metropolitan areas, Chipotle Mexican Grill has further room to add units before it reaches saturation. The company can potentially double its current 1,539 number of restaurants over the next decade or so to 3,000 store units, which is reasonable given that the industry as a whole is experiencing 4% compounded annual growth.
Don't confuse a sound value investment with growth
High returns without store count expansion are often categorized as a value investment rather than a growth stock. The Cheesecake Factory (NASDAQ:CAKE) is a good example of a value investment within the industry.
With industry-leading $10 million-plus average unit volumes, Cheesecake Factory generates strong 20% cash on cash returns. Perhaps more importantly, the dollar profit per square foot is second only to Chipotle Mexican Grill and absolute restaurant dollar profit per restaurant is the best in the industry.
With around 175 locations today, Cheesecake Factory has little growth prospects when compared to others and has little international exposure at this time. The company only plans to open eight-to-ten new locations this year with ten to twelve new restaurants next year. Management is targeting 300 total locations (a number which was referred to as an "estimate" during its recent conference call), but at the rate the company is adding locations it will take substantially longer to achieve its objectives.
This is not a rapid growth story, but rather a consistent expansion of a company that is near saturation. As such, management has adopted a more prudent financial policy of returning excess cash flow to shareholders in the form of dividends and share repurchases, as explained by the company's CFO during the most recent conference call.
We're going to do $200 million worth of share repurchases this year. I don't know that we'll be at $200 million next year but we're going to -- our earnings sensitivity range assumes that we're going to use substantially all of our free cash flow for dividends and share repurchases.
Starbucks is still the best growth story today
Despite a more than 700% appreciation in share price over the past five years, Starbucks still has plenty of growth ahead in new product offerings, which include breakfast and lunch items. The opportunity is definitely there, considering that Starbucks already has traffic as its clients require their daily caffeine fixes throughout an entire day.
Starbucks has been testing improved food offerings (sandwiches, salads, soups) in seven San Francisco locations with planned expansion to 40 locations this fall ahead of a broader roll-out sometime next year. As the average Starbucks store conducts more than 700 daily transactions, existing customers could be enticed to buy breakfast or lunch items when in the store.
To capture incremental sales in the evening, Starbucks has been testing a wine/beer and light menu assortment at a handful of locations. The margin flow-through from alcohol sales would be material.
Final Foolish Thoughts
Starbucks should still be considered the best potential growth story within the industry. While Chipotle Mexican Grill also offers tremendous growth prospects, Starbucks has the advantage of being the larger, more established company with an already existing and loyal customer base that can easily be leveraged to increase food sales. The old saying that it is cheaper to keep a customer than get a new one stands true in this case, as Chipotle Mexican Grill has recently upped its marketing campaign.
This is the complete opposite of Cheesecake Factory, which currently offers a full assortment of food products (breakfast, dessert, alcohol, retail/grocery sales etc) and has no little or new venues that can be introduced to build higher sales.
Starbucks is also active internationally and is growing in its highest-margin market (China/Asia Pacific), and has many other channels emerging in the form of the Evolution Fresh juice brand that is being sold at Whole Foods. Starbucks is also a major player in the single-serve coffee market, in which it is dominant thanks to its partnership with Green Mountain Coffee Roasters.
Jayson Derrick has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.