A favorite argument from Chipotle Mexican Grill (NYSE:CMG) bears is that the burrito chain can only open a limited number of stores in the U.S. Prior to the 2006 IPO, founder Steve Ells suggested the company could expand to 4,000 locations nationwide, and analysts have subsequently interpreted that number as a reasonable ceiling for its U.S. capacity. The company is nearly halfway to that mark now, with over 1,700 locations, leading some to believe the stock might be overvalued at a P/E of 50.
Four thousand restaurants across the country might seem like a lot, but a simple comparison with its fast-food peers shows that a number of them have significantly more than 4,000 locations nationwide, and nearly all of them are underperforming Chipotle. The tables below give a closer look:
|Restaurant||Number of units in the U.S. in 2013|
The next chart shows the same list of restaurants, ranked in order of 2013 average sales per unit, perhaps the best measurement of success and demand for the brand.
|Restaurant||Average sales per U.S. unit -- 2013|
|Taco Bell||$1.41 million|
|Burger King||$1.2 million|
The most striking part of the comparison might be that individual Chipotle restaurants bring in much more revenue than those of all of the country's biggest fast-food chains except McDonald's. Six of these chains have more than 7,000 locations, and many are still expanding. Starbucks grew its base by about 3%, or 329 locations, last year; Subway added 878 locations, for growth of just over 3%; and Dunkin' Donuts grew its store base by about 5%, or 371 locations.
Based on that information, the 4,000-location ceiling on U.S. Chipotle restaurants seems like an underestimate. Instead, the company should be able to grow to at least 6,000-8,000 stores without a significant headwind.
One of these things is not like the other
There are important differences between Chipotle and these other fast-food players. Many, like McDonald's, offer a much broader menu that could appeal to a wider range of customers. As it expands, Chipotle could find that Americans can stomach only so many burritos. The fast-casual chain also does not offer drive-thru service, or breakfast, in contrast with many of the others on the list, and it does not franchise, unlike all of its competitors. While that gives the burrito chain more control over its business, it also means it can't expand as quickly as the others.
Still, I think Chipotle's advantages outweigh the negatives. The company's blowout comparable-store sales growth for the first nine months of this year, at 17%, shows that demand for its product is still growing at a rapid clip. Millennials, the country's fastest-growing consumer segment, make up a large portion of its customers. Finally, its restaurant-level operating margin is leaps and bounds above many of its rivals: 27.4% year to date is about 10 percentage points better than McDonald's and Yum! Brands.
In recent years, Chipotle has expanded its base by roughly 12% a year, which means that at that rate it would reach 4,000 stores in about eight years. At that rate, it could double store count to 8,000 in another six years, though the pace of new store openings would likely slow before that point.
Investors should be excited about the prospects of Chipotle's ShopHouse and Pizzeria Locale, as well as Chipotle's international operations, but domestic Chipotle stores will carry the company for at least the next decade. Based on the above analysis, the future of Chipotle U.S. is brighter than many expect.