Customers love Chipotle Mexican Grill (CMG 0.17%). Don't want to take my word for it? Then take the word of the 98,000+ people who shared a story last week on "How to Get Huge Portions at Chipotle". The story was this week's top trending business story on social media.
Nom nom - /näm ˌnäm/-informal - Used to express pleasure at eating, or at the prospect of eating, delicious food: "Let's go to Chipotle, nom nom!"
As an investor, this story is all about Chipolte's incredible brand power and customer support, and recognizing how that translates into very strong financial performance.
But, as a normal guy who has eaten lunch yet today, the story has my brain thinking burritos. So...
First things first, how do you get those huge portions?
The article from Business Insider includes a handful of practical tips from a Chipotle worker on the best ways to max out your burrito at no extra cost.
From the simple -- smile at the server -- to the less obvious -- order two proteins and you'll likely get two 3/4 scoops instead of the normal 1 scoop-- the recommendations make a lot of sense for those with an extra large appetite.
For investors, the food isn't the only generous benefit
Chipotle won't release first quarter results until April 17, so in the meantime we have to look back to year end 2013 to check out the company's performance. And fortunately for the value investors among us, the financial results are about as mouth watering as the burritos.
The 2013 fiscal year saw revenues grow to $3.2 billion, which was a grain of rice short of 20% annual growth. Net income grew at nearly the exact same pace, an excellent indication that this large and fast growing company can continue to protect and grow margins -- even if 100,000 customers now know the secret to maxing out portions at no extra cost.
How? First, growth in 2013 was driven by the opening of 185 new locations, an increase of about 12%. Compare that 12% growth in restaurants with the 18% growth in revenue and net income. This points to strong same store performance, strong customer loyalty, and excellent operational performance.
Oh, and yeah, customers love eating at the restaurant. Anyone with a Facebook account can tell you that.
Even more deliciousness on the balance sheet
Chipotle's rise to national awareness happened pretty recently, but the company has been around for 20 years. You can recognize this corporate maturity on the company's balance sheet.
The harshest reality for fast growing companies is cash flow. The company needs cash to increase inventory levels to support sales growth. There is the capital expenditures needed to build new locations, buy equipment, and increase headcount. For many companies the answer is raising new equity, diluting shareholders. Others use debt, leveraging the company to sometimes dangerous levels. Other companies mismanage cash completely, eventually crippling the company.
For Chipolte, with near 20% revenue growth, with 10-15% growth in new stores, the company has been able to fund the growth entirely with internally generated cash flow. No new dilution. Very reasonable debt levels. At year end 2013, Chipotle held $0.30 in debt for every $1 in shareholder equity. In 2012, that number was $0.34.
To quickly recap -- sales and profits are soaring, debt is falling relative to equity thanks to cash flow from operations of $529 million last year, and the customer base is so loyal that a story on Facebook about Chipotle's portion sizes was shared nearly 100,000 times.
Not surprisingly, the stock has performed quite well too. Over the past 12 months Chipotle's stock has returned 79%. Over the past five years, the stock has returned 785%!!
In recent trading days, the stock has fallen off by ~3% after hitting all time highs last week. For investors, a short term drop in Chipotle's stock is like getting extra rice, beans, and meat on your favorite Chipotle burrito. The only difference is that extra portions will make you full; this stock could make you rich.
