Chipotle Mexican Grill, (NYSE:CMG) had a banner year in 2014. The fast-casual restaurant chain posted double-digit comparable restaurant sales gains in each of the first 3 quarters. Chipotle's stock had a choppier performance, but it still rose from around $525 to nearly $700 during 2014.
Some pundits are predicting that Chipotle will face a tougher road in 2015. However, while it's true that Chipotle's stellar 2014 performance will create tough comparisons for 2015, the company's momentum is so strong that it should be able to post strong sales and earnings growth nonetheless.
Crushing expectations in 2014
Chipotle has plenty of experience in exceeding investors' expectations. In late 2013, Chipotle provided initial guidance for 2014. At that time, it projected that comparable restaurant sales would rise by a low single-digit percentage, excluding the impact of any menu price increase. Last January, it revised this guidance to call for a low to mid single-digit increase.
By October, Chipotle was on pace for a 17% full-year comparable restaurant sales gain. Part of that increase was caused by a menu price increase implemented this spring. But even without the price increase, Chipotle's comparable restaurant sales growth would have exceeded 10% in 2014.
In fact, Chipotle has easily beaten its initial sales guidance every single year for 5 years running. In some years, its results have been boosted by price hikes, but often it has posted strong growth simply by attracting more customers to its restaurants and increasing peak-hour throughput.
A 2015 preview
Given Chipotle's history of regularly beating its initial comparable restaurant sales guidance, investors should have expected Chipotle to lowball its initial guidance for 2015. Instead, many people seemed to be genuinely shocked when the company's initial 2015 guidance called for low to mid single-digit comparable restaurant sales growth.
If Chipotle's growth rate were to recede to this range in 2015, it would mark a significant slowdown compared to the torrid growth pace of 2014. This could throw Chipotle's generous earnings multiple into question. However, Chipotle is likely to beat expectations yet again this year.
For example, Chipotle achieved its mindboggling 2014 sales growth in the face of a tough consumer spending environment. By contrast, gasoline prices are now down more than $1/gallon year-over-year and consumer spending has improved significantly recently. This means that consumers may spend more money on dining out in 2015.
Additionally, Chipotle is continuing to improve throughput in order to serve more customers at each location during the peak lunch and dinner hours. On a recent Chipotle earnings call, co-CEO Monty Moran pointed out that Chipotle's top-performing restaurants can serve about 3 times as many customers per hour as the company average. This means that an average Chipotle has plenty of room to go faster.
One way that Chipotle can boost throughput is by completing more transactions away from the main service line. Chipotle introduced catering a couple of years ago, and catering is now available in every market other than New York. Chipotle is also investing in mobile payments, because the cash register tends to be the biggest bottleneck in its stores.
History is not on the skeptics' side
In each of the past 5 years, Chipotle has comfortably exceeded its initial guidance despite facing a tough consumer spending environment marked by choppy GDP growth and rising gas prices. In 2015, both of these historical headwinds are on pace to become tailwinds.
Difficult comparisons could offset some of this momentum. Nevertheless, Chipotle's track record suggests that high single-digit comparable restaurant sales growth (at a minimum) should be feasible in 2015.
Barring another big spike in food costs, that should be enough to drive another year of greater than 20% earnings growth for Chipotle. As long as Chipotle keeps growing earnings rapidly, its stock can continue marching higher despite its lofty valuation.