Please ensure Javascript is enabled for purposes of website accessibility

Chipotle's Blowout Earnings Report: Should You Buy?

By Andrés Cardenal – Feb 2, 2014 at 5:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Chipotle is firing on all cylinders, and the company is strongly positioned for growth for years to come. Should you take a bite of this spicy burrito company?

Chipotle Mexican Grill (CMG 4.78%) delivered a truly spectacular earnings report for the fourth quarter of 2013. Other companies in the industry, such as McDonald's (MCD 1.07%) and Starbucks (SBUX 3.59%), are being affected by lackluster consumer demand, and this makes Chipotle's performance even more impressive by comparison. Should you take a bite of this spicy burrito company?

Mouthwatering growth
Revenues for the fourth quarter of 2013 increased by 20.7% versus the same quarter in the previous year to more than $844 million. Comparable-restaurant sales jumped by 9.3%, and the company opened 56 new restaurants during the quarter, bringing the total store count to 1,595 locations.

Food costs are rising, but Chipotle still managed to increase net profit margin to 9.4% of revenue, versus 8.8% of sales in the fourth quarter of 2012. Restaurant-level operating margin increased by 100 basis points to 25.6%, and diluted earnings per share grew by 29.7% versus the same quarter in the prior year to $2.53 per share.

The company achieved its fastest throughput rates ever during the quarter, with an average increase of six transactions during peak lunch hour and an increase of five transactions during peak dinner hour. That means not only better customer service, but also more efficiency and accelerating sales growth.

Moving forward
The company is firing on all cylinders, and comparable sales performance shows that Chipotle is far from reaching any kind of market saturation levels, as demand remains considerably strong and new store openings aren't cannibalizing sales at previously existing locations.

Even better, Chipotle is positioned for growth for years to come. The company continues taking care of its customers and focusing on its core "food with integrity" mission. Management expects the chain to become completely GMO-free by the end of this year, and product innovations such as its Sofritas vegan menu resonate well among its client base. Besides, Chipotle is successfully expanding its catering program, which is a great way to increase sales without incurring much in extra costs.

Even if the company has multiple opportunities for growth in areas such as international expansion and new concepts such as ShopHouse and Pizzeria Locale, it will continue prioritizing new Chipotle restaurants in the U.S. over the middle term.

Industry context
Global fast-food giant McDonald´s has been reporting stagnant sales for quite some time, and the December quarter was no exception at all. Global comparable sales decreased by 0.1% during the period as the average check was higher, but traffic declined versus the fourth quarter in 2012. Performance was even worse in the U.S., with comparable sales falling by 1.4%.

McDonald's problems can't be entirely blamed on industry conditions. The company is behind the competition in areas such as menu innovation, and the quality of the service has been suffering lately. Still, with nearly 34,500 stores around the planet and one of the most recognizable brands in the industry, what happens at McDonald's says a lot about the health of the quick-service restaurant business.

Even a remarkably successful player like Starbucks delivered lower-than-expected growth rates in North America for the fourth quarter of 2013. The company still reported a healthy increase of 8% in revenues in the region on the back of a 5% growth rate in comparable-store sales, but this was below analysts' expectations.

CEO Howard Schultz highlighted how changing consumer habits represent considerable challenges for different companies in the consumer business: "Holiday 2013 was the first in which many traditional brick-and-mortar retailers experienced in-store foot traffic give way to online shopping in a major way."

It's not easy to generate growth in the current consumer landscape, so Chipotle's results are even more extraordinary when interpreted in the context of challenging industry conditions.

Bottom line: Should you buy?
After rising by more than 11.7% on Friday, Chipotle is trading at a demanding valuation, with a forward P/E ratio near 35 times earnings estimates for the next year, so patience seems like a smart idea when building a position in the stock. On the other hand, Chipotle is a unique growth company with plenty of room for expansion in the coming years, so it's definitely a name to buy on pullbacks and hold for the long term.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks. We Fools don't 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.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chipotle Mexican Grill Stock Quote
Chipotle Mexican Grill
CMG
$1,626.96 (4.78%) $74.24
McDonald's Stock Quote
McDonald's
MCD
$272.79 (1.07%) $2.90
Starbucks Stock Quote
Starbucks
SBUX
$102.20 (3.59%) $3.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.