Can Noodles & Company and Potbelly match Chipotle’s burrito?

Chipotle Mexican Grill's (CMG 2.41%) sales have grown 18% annually over the last three years. Their first three quarters' revenue of $2.37 billion is up 16.7% from this time last year. The company grew revenue in 11 of its 12 quarters. By the end of the fiscal year, the Mexican fast casual restaurant chain expects to have opened 165–180 new restaurants -- with another 180–195 new restaurants opening in 2014. Success is also driven by their existing restaurants, as comparable restaurant sales grew 4.3% in the first nine months of the year, compared to same period last year. All this growth has attracted investors as its stock price has nearly doubled in the last 12 months.

However, two restaurants, Noodles & Company (NDLS -0.36%) and Potbelly (PBPB -1.21%) , are seeking to compete in the same fast casual restaurant space. Both companies listed their IPOs in 2013 (Noodles in July and Potbelly in October), but how do they measure up to Chipotle?

A closer look at Chipotle

According to its third quarter earnings press release, Chipotle has over 1,500 restaurants located throughout the world. However, only 14 restaurants are based outside the U.S., including a recent opening in Germany.   The untapped international market offers Chipotle room to grow beyond its concentrated U.S. market.

Chipotle has also been experimenting with new food items. Sofritas— a mixture of artisan tofu, roasted poblano peppers and a blend of herbs and spices—will be offered as a vegan protein in 650 restaurants by the end of the year.The company has moved away from GMO ingredients, which has attracted the attention of healthy and environmentally aware customers. Chipotle has opened a third ShopHouse, a Southeast Asian-inspired concept restaurant which offers noodles, rice, curries and wok-seared vegetables, among other items. Furthermore, Chipotle recently announced they were experimenting with a pizza restaurant that would bake the pizza within two minutes.

Who's using your Noodle?

Noodles & Company—whose international cuisine includes noodle dishes, pasta and sandwiches—is looking to replicate Chipotle's success. In fact, CEO Kevin Reddy and COO Keith Kinsey both previously held executive roles at Chipotle.   However, Noodles' revenues have grown at a much slower pace than Chipotle's.

Revenue during Noodles' first three quarters grew 16.6% to $259.5 million when compared to the same period last year. Noodles has also reported 16 straight quarters of comparative same store sales growth.  The company continues to expand, with 34 company-owned restaurants and seven franchise restaurants opening by the end of third quarter 2013. This brings the number of Noodles & Company restaurants up to 310 locations, 58 of which are franchised. An additional 40 restaurants are expected to open in 2014.  Noodles is looking toward a long-term goal of 2500 restaurants, which would take a decade of double digit growth. ("Noodles & Company," RBC Capital Markets, November 7, 2013) Noodles' existing restaurants have experienced a slower growth than Chipotle, with comparable Noodles' restaurants growing only 2.7% over the first three quarters compared to the same period last year. 

Potbelly, here I come...

In its first ever earnings report, Potbelly, a specialty sandwich shop, saw YTD 2013 revenue growth of 11.7% to $225 million. 29 new restaurants opened in the first nine months, four of which were franchise shops. This brings Potbelly's location count to 307 shops, 19 of which are franchised. Unlike the other two companies, Potbelly has a relatively larger international presence, with 12 restaurants in the Middle East. However, Potbelly was the laggard of the three in terms of growing comparable restaurant sales in the first nine months, at a growth rate of 1.8%, compared to same period last year. 

How do they all compare?

Below is a chart showing how the three restaurants match up against one another on a per store basis:

As shown, Chipotle has the current advantage in terms of number of stores, average sales per store and margins per store. On the other hand, Noodles and Potbelly, even at this early stage, have promising sales and margins per store that allow their respective companies to grow. However, if they want to match or contest their Mexican restaurant rival, both Noodles and Potbelly will need to have more of their growth driven by growing comparable restaurant sales than to rely on opening new locations. As detailed earlier, Chipotle's existing restaurant locations have grown their sales at a faster rate than either Noodles' or Potbelly's.

Chipotle's improved margins are the result of their tinkering with their operations, with measurable results. The 3Q2013 saw a throughput increase of five transactions during the peak lunch hour rush.  They have incorporated the "expediter" position, whose responsibilities include bagging the burritos after they are wrapped but before the food has been paid for, to speed the transactions along. Chipotle also has a "line backer" position, a manager standing behind the burrito assembly line who's charged with making sure everything's working right, who helps monitor and coordinate the frontline service with the kitchen.  

It remains to be seen if Noodles and Potbelly can match up with Chipotle's margins. Noodles has one operational advantage that Chipolte does not: Noodles makes seasonal adjustments to its menu which allows for more experimentation to find more popular dishes. Potbelly has more challenges than the other two. Potbelly's franchise investment runs over $700,000, compared to their giant competitor, Subway, which charges franchisees slightly over $78,000. Potbelly costs more to run, as they require 16-20 workers during peak hours, while other sandwich competitors can get by with as few as four or six. While the decor and service of Potbelly is generally better than that of your average sandwich restaurant, it remains to be seen if that is enough of a difference for customers and investors.

What Does This All Mean?

Chipotle remains the heavyweight in terms of fast casual restaurants. The company is still in growth mode, with expansion opportunities available in the international market, in food selections, and would be the safer bet as an investor. While Noodles and Potbelly have promising starts, it remains they are just flashes in the pan or be able to mirror the success of their Mexican-themed counterpart.