Chipotle Mexican Grill (NYSE:CMG) is perhaps the most successful growth story in the restaurant industry in recent years. The company's Mexican-style menu is a booming success among customers, and investors have been rewarded with succulent gains over time, as Chipotle stock is up by nearly 350% in the last five years.
However, investors reacted negatively to the company's earnings report for the first quarter of 2015, and Chipotle stock is down by 13% from its high of the last year. Is this an opportunity to buy Chipotle at an attractive entry price or should the company's shareholders brace themselves for continued weakness?
Is Chipotle losing its flavor?
When looking at the numbers for the last quarter, investors would be hard pressed to find a restaurant company doing much better than Chipotle, particularly when keeping size in consideration.
Total revenue for the first quarter grew by a mouthwatering 20.4%, reaching $1.1 billion. Comparable restaurant sales jumped 10.4%, and Chipotle opened 49 new restaurants, bringing the total store count to 1,831 units. This kind of performance is nothing short of impressive for a restaurant chain this large.
Importantly, the company also expanded its profitability during the quarter. Restaurant-level operating margin was 27.5% of sales, an increase of 160 basis points from the first quarter of 2014. Rapidly growing sales and an increasing profit margin led to a 47% year-over-year increase in earnings per share.
Both sales and earnings are moving in the right direction at an amazing speed, and the numbers were also above Wall Street analysts' expectations, so the recent decline in Chipotle stock can hardly be attributed to performance during the last quarter.
On the other hand, management expects comparable-store sales to increase in the low-to-mid single-digits for the full year, which indicates a considerable slowdown in the coming quarters.
The factors behind the slowdown
Chipotle raised prices in the second quarter of last year. Management said 6.1% of the 10.4% increase in same-store sales in the first quarter was due to higher prices. This shows year-over-year comparisons will become much tougher in the second quarter of 2015 and beyond.
Chipotle also suspended one of its pork suppliers in January after a supply chain audit found the company was not fully compliant with Chipotle's standards. Among other things, Chipotle's protocol requires pigs to be raised with access to the outdoors or deep bedding in barns, and without the use of antibiotics.
Chipotle stopped using pork from this supplier, which caused pork outages in more than one-third of its restaurants. Many Chipotle customers tend to eat the same menu item every time they visit, so the carnitas scarcity was not fully offset by other items, and management calculates this shortage is hurting sales growth by approximately 200 basis points.
The company is on track to secure a new pork supplier. Chipotle plans to introduce this new pork in some of its restaurants in the coming months. If things go well, the company will steadily increase its supply throughout the third quarter, getting back in full supply during the fourth quarter of 2015.
The long-term view
Even if growth slows over the middle term, Chipotle still offers enormous room for expansion. Management believes it can open 3,000 restaurants in the U.S., which sounds like a reasonable target considering the company's track record of success and the avid demand for its burritos made with integrity and natural ingredients. Besides, Chipotle is barely taking its first steps when it comes to international expansion.
Chipotle is also doing an amazing job in making more revenue in each restaurant -- average restaurant volume surpassed the $2.5 million mark for the first time ever in the last quarter. Over the past three years, Chipotle has increased average volume by more than $500,000 per restaurant, while at the same time adding more than 600 locations to its base.
The company is also expanding into Asian cuisine and pizza with ShopHouse and Pizzeria Locale, respectively. Only 10 ShopHouse units and two Pizzeria Locale restaurants are operating so far, so these concepts could offer tremendous growth if Chipotle can do with them even a fraction of what it's doing in Mexican food.
Growth rates over the coming quarters will be hard to predict, but everything suggests Chipotle's long-term growth story remains intact. Uncertainty usually creates opportunity, and such seems to be the case with Chipotle stock.