Don't get me wrong: I think that Chipotle Mexican Grill
On the surface, Chipotle's third-quarter results aren't so bad. Revenue was up by 18.9%, and same-store sales increased by 3.1%. But what if I told you that the same-store sales increase was primarily driven by price increases from previous quarters? Add that tidbit to Chipotle's plans to increase prices by another 6% this quarter, to counter increasing commodity costs, and you get a not-so-tasty combo meal.
These commodity-cost increases are already hitting profits: Operating margin dropped by 160 basis points to 21.4%. Net income decreased by 5.5%, and EPS dropped by 4.8%, even with the price increases that consumers have already swallowed. Chipotle plans to buy as much as $100 million of Class B shares; while that'll certainly boost future EPS growth, it'll also consume almost 50% of the company's current cash stash.
I love that the company has no debt, and that it will continue to fund its new store openings entirely through operational cash flow. I just question how scared consumers will take a 6% increase in prices that are already hovering at the premium end of the quick-serve restaurant business. Former Chipotle parent McDonald's
McDonald's recent success reflects a trend we've seen across restaurants and retail in general: The Value Menu is trumping premium products. Foodies like Wendy's Arby's Group
At a trailing P/E of more than 19, and dwindling same-store sales and earnings growth in today's market, Chipotle just doesn't seem to offer superior long-term investment value, especially when you can buy value-focused and dividend-yielding McDonald's stock at a P/E less than 14.
Further muy caliente Foolishness:
Fool contributor Colleen Paulson does not own positions in any of the stocks mentioned above, but she's always game for a Spicy Chicken Burrito. The Motley Fool has an organic, free-range disclosure policy.