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Chipotle vs. Noodles: Where Is the Growth?

By Philip Saglimbeni - Apr 7, 2014 at 2:48PM

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Which of these two restaurant stocks is currently worth buying?

Since many investors and analysts are keen to find out whether Noodles & Company (NDLS 0.43%) is a Chipotle Mexican Grill (CMG -0.03%) in the making, it is necessary to analyze the similarities and differences between the two businesses. While both companies appear to be viable long-term growth investments, you only need exposure to one stock in this market segment. Let's figure out which company makes for the better buy-and-hold play.

Source: Chipotle.

Growth potential
As of year-end fiscal 2013, Noodles operates 380 restaurants nationwide, including 318 company-owned locations and 62 franchised locations. Meanwhile, Chipotle operates 1,595 total store locations as of year-end fiscal 2013. While some investors may automatically expect the company with a smaller presence to be growing more quickly, this is not always the case.

In the most recent quarter, Noodles opened 12 new stores in total, eight of which are company-owned and four of which are franchised. This represents a quarterly growth rate of 3.2%. In the same time period, Chipotle opened 56 new restaurants, representing a quarterly growth rate of 3.6%.

Source: Noodles & Company.

Recently, the much larger Chipotle has opened restaurants at a faster pace than the smaller Noodles & Company. How about going forward?

Noodles management announced that the company expects to open 42 to 50 company-owned stores, representing growth of 13%-16%, and 10 to 15 franchised stores, representing growth of 16%-24%.

Meanwhile, Chipotle management expects to open 180 to 195 new restaurants in 2014, representing a yearly growth rate of 11.2% on the low end and 12.2% on the high side.

So, the smaller company seems to be gaining ground on its larger competitor. However, one big potential growth driver for Chipotle is the expansion of its two new restaurant concepts, ShopHouse and Pizzeria Locale. While it is difficult to consider the new concepts as meaningful growth drivers in the short term, the long-term impact of the new brands could be massive. At the end of last quarter, there were only six ShopHouse locations and one Chipotle-owned Pizzeria Locale location, which means there is substantial groom for growth in domestic markets for both brands.  

As Chipotle management continues to develop and fine-tune its new brands in an attempt to make them similar to its Mexican-themed brand, there appears to be no reason why the new concepts won't enjoy similar success. Accordingly, Chipotle could be about to expand at a much faster pace going forward.

Operating performance
However, Chipotle is outperforming Noodles in other areas as well. The company's same-store sales growth rate of 5.6% in the fourth quarter was better than Noodles' 3.9%. This is an area in which Chipotle's company-owned restaurant approach wins out. Noodles experienced solid comp sales growth of 4.3% in company-owned locations but only 1.9% comp growth in franchised locations. 

Going forward, Chipotle is predicting comp sales growth of low-to-mid-single digits in restaurants in 2014, excluding any menu increases. Noodles is predicting a slower comp sales growth range of 2.5%- 3% in 2014. 

Additionally, Noodles falls far short when it comes to margins. The company's net profit margin of 1.9% and operating margin of 6% are both way below Chipotle's respective margins of 10.2% and 16.7%. This indicates that Chipotle is better at controlling costs than Noodles.

Bottom line
When it comes to growth investing, bigger is not necessarily better. However, in the case of Chipotle versus Noodles, the larger company seems to be better, as it appears to be the more stable investment. Although both companies appear poised for long-term growth through the expansion of restaurant locations, the edge has to go to Chipotle here. The company has a solid industry position and a more recognizable brand.

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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,287.80 (-0.03%) $0.41
Noodles & Company Stock Quote
Noodles & Company
$4.67 (0.43%) $0.02

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