Chipotle Mexican Grill (NYSE:CMG) and Panera Bread (NASDAQ:PNRA.DL) are two of the leaders of the popular fast-casual movement. Both restaurant chains are known for having higher-quality food than traditional fast-food competitors, and both have close to 2,000 restaurants.
They also both sport fairly pricey valuations. Shares of Chipotle and Panera each hit new all-time highs this past week. Chipotle stock now trades for about 43 times its expected 2015 earnings, while Panera isn't far behind at 33 times expected 2015 earnings.
However, while the two fast-casual chains have a lot in common, they're not equals from an investing standpoint. Chipotle is a much better bet because of its superior growth and earnings profile.
Growing faster than Panera
Over the past five years, Chipotle's revenue growth trajectory has diverged sharply from that of Panera. Chipotle's revenue has soared by 155%. Panera's five-year revenue growth of 77% isn't too shabby, either -- but it's still just half of the growth Chipotle posted during that period.
The comparison between Chipotle and Panera isn't perfect, because Chipotle does not franchise, whereas Panera has a mix of company-owned and franchised restaurants. But the proportion of company-owned locations has increased slightly at Panera over the past five years, suggesting that total system sales have grown at a somewhat slower rate than revenue for Panera.
Chipotle continues to grow faster than Panera today. In Q2, revenue rose 14.1% year over year on a comparable-restaurant-sales increase of 4.3%. Meanwhile, Panera's revenue rose 7.2% on a 2.4% comparable-sales increase at company-owned locations.
New location growth is a difference-maker
To be fair, Panera told investors this past week that comparable sales growth has accelerated in July, with a 4.7% gain at company-owned locations through the first 27 days of Q3. By contrast, there's a good chance that Chipotle's comp sales growth will decelerate sequentially in Q3, as it surpassed a significant price increase from 2014 last quarter.
However, even if Panera beats Chipotle in comparable-sales growth this quarter, it will lag in terms of total revenue growth. That's because Chipotle is adding restaurants at a much quicker pace.
On Chipotle's recent earnings call, management told investors that the chain will probably end the year at or above the high end of its guidance for opening 190 to 205 new restaurants. By contrast, Panera plans to open 105 to 115 new locations systemwide. Chipotle is thus expanding its footprint at almost twice the rate of Panera, and it's on pace to overtake Panera in terms of systemwide restaurant count by the end of 2015.
This trend is likely to continue for the foreseeable future. Chipotle is still far from saturating the market and could potentially more than double its presence in the U.S. over time. It's also expanding internationally and testing two new restaurant concepts to add to its flagship chain. Panera has solid growth prospects, too, but not to the same extent as Chipotle.
Better on the earnings front, too
Chipotle's significantly higher growth rate is a strong sign that it's a better investment candidate than Panera, despite trading at a pricier earnings multiple.
However, a look at the two companies' earnings profiles seals the deal. In 2014, Panera's operating margin was 10.9%, down from 13% a year earlier. Panera expects its operating margin to decline again in 2015, primarily because of investments in the new Panera 2.0 operating model and higher healthcare costs.
By contrast, Chipotle's operating margin reached 17.3% in 2014, up from 16.6% in 2013. It's on pace to deliver another year of margin expansion in 2015. So not only does Chipotle have a significant margin advantage, but this advantage is also getting bigger over time.
Panera's shaky performance also means that it's not delivering consistent earnings growth. Adjusted EPS increased less than 1% year over year in 2014, and Panera expects EPS to decline in 2015. Analysts forecast that EPS will bounce back in 2016, but only to 3% more than what Panera earned in 2013. By contrast, analysts expect Chipotle to earn nearly twice as much in 2016 as in 2013.
Investors can hope that Panera's EPS growth will strengthen once it makes more progress on implementing the Panera 2.0 initiatives to improve its operations. And Chipotle clearly can't double EPS every three years going forward. However, Chipotle is likely to deliver much higher long-term earnings growth than Panera, making it a much better investment candidate by far.