Chipotle Mexican Grill (NYSE:CMG) has been one of the most explosive success stories in the restaurant business during the last several years, and the stock has reflected this success with delicious returns for investors. But investment decisions need to be based on future potential, not past performance.
Is now a good time to take a bite of Chipotle Mexican Grill stock, or is the burrito maker too hot to handle?
Spicy growth rates
Saying that Chipotle Mexican Grill is a successful business could be an understatement. The company has delivered truly exceptional financial performance over the long term, as sales have increased from $315.5 million in 2003 to more than $3.2 billion in 2013.
Growth tends to slow down as companies become bigger over time, especially because success attracts competition, and the restaurant business is a particularly competitive environment. However, there's no slowdown in sight when it comes to Chipotle Mexican Grill; the company continues defying gravity, and delivering truly mouthwatering financial results for investors.
Sales during the second quarter of 2014 increased by a whopping 28.6% year over year, to $1.05 billion, driven by an extraordinary growth rate of 17.3% in comparable-restaurant sales. In addition, Chipotle opened 45 new restaurants during the quarter, bringing the total restaurant count to 1,681 units.
This level of performance is quite uncommon for a restaurant chain as big as Chipotle. To put things in perspective, this was the second-biggest increase in comparable-restaurant sales that Chipotle has reported in its history as a public company. It only reported a bigger increase of 19.7% the first quarter of 2006, a time in which Chipotle had a materially smaller restaurant base of less than 500 units.
Importantly, Chipotle is generating this outstanding growth rate while raising menu prices to pass along rising food costs to customers. The company rolled the price increase throughout the quarter, starting in late April and finishing in late June, so the effective price increase of 2.5% in the quarter reflects only a partial impact.
Still, investors should feel comforted by the fact that Chipotle is delivering rock-solid sales growth while raising prices, as this speaks wonders about the company's pricing power and overall demand strength.
Chipotle's success needs to be attributed to a combination of factors. The company's "food with integrity" approach to Mexican cuisine resonates remarkably well among customers. While health and sustainability implications are important for many consumers, the fact that fresh and more natural ingredients have a better taste is clearly a big plus, too.
The company is a remarkably efficient operator, and it has consistently managed to generate impressive throughput rates -- the speed at which Chipotle moves customers through its lines. According to management, Chipotle managed to generate a 9.4% transaction-comparable increase during peak lunch hour, and a 13.3% transaction-comparable increase at peak dinner hour via higher throughput in the last quarter.
Menu innovations, such as its successful Sofritas vegan menu item made with organic tofu, can always provide additional venues for growth. Chipotle is also expanding its catering business, which represented 1.6% of total sales in the second quarter of 2014 versus only 0.3% of revenue in the same period last year.
Considering demand strength in the U.S., the company still has a lot of room for expansion in its home market. Besides, Chipotle has barely scratched the surface in global markets, so investors have solid reasons to expect consistent growth in the store base during the coming years.
Chipotle is experimenting with new concepts, such as Asian cuisine at ShopHouse, and pizza at Pizzeria Locale. If the company can achieve with ShopHouse and Pizzeria Locale at least a fraction of the success it has obtained in its main Chipotle concept, the door could be open for gigantic opportunities in the years ahead.
Should you buy now?
Expectations are high for Chipotle: The company trades at a forward P/E ratio of 39 times earnings forecasts for the coming year, so the stock could be vulnerable to any disappointment in the short term. Maybe it would be a good idea to be patient and wait for a pullback before taking a full position in the stock.
One thing looks quite clear, though: Chipotle is an exceptional company with enormous growth prospects in the long term. This is the kind of name you want to have in your portfolio for years to come, and any retracement is likely to turn out to be a buying opportunity for investors.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. 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.