Chipotle Mexican Grill's (NYSE:CMG) price tag may scare off some long-term investors. After all, at a P/E of 57 and a valuation of $20 billion, the stock isn't cheap. But profits are soaring at the burrito roller, and when it reports third-quarter results on Monday, earnings per share is expected to pop 44% to $3.83. And while that growth is certainly impressive, Chipotle's prospects look just as bright over the long haul. Here are a few reasons why:
No franchising, no debt
McDonald's (NYSE:MCD) and other heavyweights of the fast food industry have long favored the franchise model, which enables companies to expand quickly without the investment of running the restaurants themselves. While the franchise model has enabled McDonald's to open 35,000 restaurants worldwide, it has also cost the company significant profits as company-operated locations deliver about twice as much operating profit on average as their franchise counterparts.
Chipotle experimented with franchising before it was a publicly traded company, but quickly bought out those partners in order take control over its business. Food culture and people culture are at the center of Chipotle's business model, and resisting franchising has helped it maintain control over its brand and drive its success. In Entrepreneur magazine, Chipotle's Communication Director Chris Arnold said companies generally franchise because they need the money or need operators to run their restaurants. Chipotle, however, hasn't had that need.
Similarly, Chipotle has maintained control by avoiding taking on debt. That means the company has no interest expense to cut into profits, and has no potential conflict of interest with creditors. McDonald's, by contrast, has nearly $15 billion in debt on its books.
It's already bested the competition
For several years, every hot restaurant IPO was rumored to be the "Next Chipotle," however nearly all of them have fizzled. Chipotle naysayers have consistently said that the restaurant's model can be easily replicated, and that the company is vulnerable to competition. There have been plenty of pretenders such as Qdoba, Baja Fresh, and Lime Fresh Mexican, but none of them have stuck.
Hedge fund manger David Einhorn famously announced he was shorting the burrito chain in 2012 due to, among other things, competition from Taco Bell's new Cantina Bowl lineup, essentially a cheaper imitation of Chipotle's menu. However, despite having many more locations than Chipotle, Taco Bell failed to knock Chipotle from its throne. At last check-in, Chipotle's comparable sales were up 17.3%, while at Taco Bell they improved just 3%.
Commentators seem to have finally learned from their mistakes. While anyone can sell burritos, Chipotle's food quality and people culture are difficult to match, and the decision to not sell franchises or debt has only made the company stronger. With 1,700 restaurants and many more to come, Chipotle is only putting more distance between itself and the competition.
They're not resting on their laurels
The success of Chipotle in the U.S. is undeniable at this point, but the company is already taking steps to open up new revenue streams in three major ways. Expansion of Chipotle internationally, and rolling its new ShopHouse concept, which applies the Chipotle model of assembly and fresh-cooked food to Southeast Asian cuisine, and through an investment in Pizzeria Locale.
There are now eight ShopHouse Southeast Asian Kitchens with two more on the way. Reviews of ShopHouse have been solid thus far as the original location gets an 85% approval rating on UrbanSpoon. Though management has kept mum on the performance of ShopHouse thus far, expansion is picking up, and the new chain figures to be an important source of growth for Chipotle in the future.
Internationally, the company now has 17 restaurants outside of the US with the majority in the UK and Canada. Like ShopHouse, the international expansion is initially moving slowly as the company builds brand awareness, and prices in Europe are often higher to offset more expensive occupancy costs, but reviews have been generally positive.
Finally, the company has become an investor in Pizzeria Locale, which, with just two locations, is the most nascent of its expansion options, but nonetheless, presents a third growth opportunity for the company. Of the three food concepts, pizza perhaps has the most potential due to its overwhelming popularity, and both of the restaurant's locations have received 4-star ratings on Yelp.
One for the road
Chipotle Founder Steve Ells consistently reminds investors that the key driver of the company's growth for the foreseeable future will be Chipotle expansion in the U.S., but the fast casual chain is putting all the right pieces in place for continued growth for at least the next decade or two. It's maintained full control over its business, avoiding the conflicts with franchisees and creditors that hamper other restaurants, it's proven that its business model is not easily replicable, giving it a competitive advantage, and it has laid out a pipeline to ensure growth once Chipotle begins to saturate the domestic market. The stock's volatility will likely continue, but over the long-term Chipotle looks like a clear winner.