Moe's Southwest Grill has a buyer.
The fast-growing chain of Mexican food restaurants will be acquired by privately held FOCUS Brands. Moe's has been a quick learner, going from one to 345 units in a little over six years. Like many fast food concepts, Moe's has been able to grow quickly by franchising its stores to budding entrepreneurs.
FOCUS knows a thing or two about the merits of franchising. It is also the company behind Carvel, Cinnabon, Seattle's Best Coffee, and Schlotzsky's. Collecting royalties on burritos and quesadillas will fit right into the portfolio of a franchisor that's made a living out of skimming a little off the top of every Fudgie the Whale ice cream cake or Cinnabon Stix sold.
However, Moe's also shows us the darker side of franchising. The company is being sued by more than two dozen franchisees, claiming that the company has misspent advertising fees and that charity collections weren't distributed accordingly.
Taking the "grunt" out of disgruntled
There is little doubt that the legal overhang made the Moe's chain available. Moe's joins Chipotle (NYSE:CMG) and Jack in the Box's (NYSE:JBX) Qdoba as fast-growing Mexican quick-service concepts. Those three hot chains compare favorably to the stagnant growth at other prominent rivals, like CKE Restaurants' (NYSE:CKR) La Salsa. Wendy's (NYSE:WEN) also eventually had enough of its sluggish Baja Fresh, selling it off for a pittance a few months ago.
This brings me to yet another reason why I'm a fan of Chipotle. As if its impressive streak of heady comps gains, market-thumping quarters, and critically acclaimed eats weren't enough, it's also unlikely to draw the ire of its franchisees. Chipotle emphasizes company-owned locations. That may translate into higher costs to expand, as the company bankrolls every new Chipotle, but it also means that it is in complete control of its future as well as maintaining the brand experience.
Chipotle is still going to grow like crazy. The company is looking to add about another 100 units to its empire of more than 500 burrito havens. Even though having Moe's go to a more seasoned franchisor may find Chipotle bumping into healthier competition, it hasn't had a problem thriving in a niche that is sadly crowded with mediocrity. Don't even get me started on comparing a Chipotle burrito to anything on the Yum! Brands' (NYSE:YUM) Taco Bell menu!
Rolling it the Chipotle way
Having control over its company-owned empire is a good way to avoid surprises. The company has obliterated Wall Street's profit targets in each of its first five quarters as a public company.
|
Estimate EPS |
Actual EPS |
Difference | |
|---|---|---|---|
|
Q4 2005 |
$0.11 |
$0.16 |
45% |
|
Q1 2006 |
$0.12 |
$0.26 |
117% |
|
Q2 2006 |
$0.25 |
$0.33 |
32% |
|
Q3 2006 |
$0.27 |
$0.36 |
33% |
|
Q4 2006 |
$0.28 |
$0.33 |
18% |
The market rewards companies that underpromise and overdeliver. It is at the heart of most of the great growth stocks, and it hasn't disappointed Chipotle investors. Shares of Chipotle have been on a tear, nearly tripling since going public at $22 last year. I also recommended the stock to Motley Fool Rule Breakers subscribers three months ago. Bill Mann singled out the lower-priced Chipotle Class B (NYSE:CMG-B) shares in the Motley Fool Hidden Gems newsletter.
Can a lack of disgruntled franchisees be the ticket to elated shareholders? It doesn't always work that way, but it has certainly proved true for Chipotle. Now let's see if new owners for Moe's can keep angry franchisees -- and even the estate of Jerry Garcia -- happy. For more on these burrito behemoths, check out:
Chipotle has been one of the many fast-growing recommendations out of the Motley Fool Rule Breakers newsletter service. The stock also got the nod from the Motley Fool Hidden Gems team. What makes Chipotle so special? You can dig into any of its burritos for a taste test, then give either newsletter a taste test with a 30-day free trial.
Longtime Fool contributor Rick Munarriz lives in Coral Gables, where he's shocked to see that a Qdoba is about to open up on the same block as a Baja Fresh. He does not own shares in any of the stocks in this story. Rick is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
