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Guess Which Burrito Chain Is Beating Chipotle at Its Own Game

By Bob Ciura - Sep 8, 2015 at 6:17PM

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Qdoba Mexcan Grill generated double the comparable sales growth as Chipotle last quarter, and growth over the remainder of the year may be just as impressive.

Chipotle Mexican Grill (CMG 4.59%) is typically regarded as the premier growth stock in the fast-casual restaurant space. And for good reason -- Chipotle's stock is up over 300% in the past five years, cementing Chipotle's reputation as the king of burritos.

But a smaller competitor is sneaking up on Chipotle. It turns out that Qdoba Mexican Grill, operated by Jack in the Box (NASDAQ: JACK), is growing faster than Chipotle right now. As a result, Jack in the Box, and not Chipotle, may be the better stock to buy now.


Source: Flickr.

Qdoba eats Chipotle's lunch
Chipotle is doing well this year. Comparable sales are up 7% over the first half, which is a strong number. But there are a couple of important things investors should know. First, the increase in comparable sales is due almost entirely to price increases. Management noted as much, crediting price increases more than traffic for growth over the first half. This may be a sign of an upcoming slowdown, and indeed, management expects only low- to mid-single-digit growth in comparable sales for the full year.

Such a low growth figure is in part due to the ongoing pork supply issues at Chipotle. Earlier this year, Chipotle suspended its major pork supplier because it didn't meet Chipotle's animal-welfare protocol. Chipotle has since found a new supplier, but the ripple effects will be longer lasting. Chipotle doesn't expect to resolve the shortage of its carnitas, a very popular menu item, until closer to the end of the year. That could cause comparable sales in future quarters to mimic last quarter's disappointing 4% growth.

In comparison, Qdoba grew comps by 10% over the first three fiscal quarters, year over year. This was much better than the Jack in the Box brand, which grew comparable sales at a relatively impressive 6% in the same time. Qdoba is a meaningful driver for Jack in the Box, as the burrito chain represents 32% of total revenue. If Qdoba continues to grow at such a high rate, it will have a very positive effect on the overall company.

Qdoba's outstanding performance helped Jack in the Box as a whole generate 24% operating EPS growth in that time. And Qdoba's growth rate is accelerating. Comparable sales growth over the first three quarters was nearly double the growth rate in the same year-ago period. Management noted increases in both traffic and the average check at Qdoba. Another factor working in Qdoba's favor is catering, which grew sales by double digits last quarter.

Going forward, management expects these trends to continue. Qdoba is expected to produce 8% to 8.5% growth in same-store sales this fiscal year. Plus, total sales will increase from new restaurant openings. Jack in the Box plans to open as many as 45 new Qdoba restaurants this year, which would represent 7% unit growth from the previous year.

Jack in the Box may have more to offer
Considering that Qdoba is outperforming Chipotle this year, Jack in the Box's more attractive valuation is another reason that it, not Chipotle, may be the better burrito stock to buy. Jack in the Box is valued at 30 times earnings, which is still rich, but not quite as rich as Chipotle, which trades for above 40 times EPS. And Jack in the Box offers the added measure of a 1.5% dividend yield, as well as the likelihood of high dividend growth going forward. Earlier this year, Jack in the Box raised its dividend by 50%.

Chipotle has the more universally recognized brand, but Qdoba is no slouch. In fact, because of its higher growth, cheaper valuation, and dividend payout, investors may want to take a closer look at Jack in the Box.

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Stocks Mentioned

Jack in the Box Inc. Stock Quote
Jack in the Box Inc.
JACK
$67.04 (-2.66%) $-1.83
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,402.42 (4.59%) $61.51

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