Earlier this week, Chipotle Mexican Grill (NYSE: CMG) reported second-quarter earnings showing net income rose 27%, revenue rose 14.1% and same-store sales rose by a much more modest 4.3%.
First, the stock swooned. Then it skyrocketed, rising almost 8% on Wednesday to reach an all-time high of $725.82.
What’s going on?
Well, in a nutshell, or make that a taco shell, investors seem to have been spooked by the weak same-store sales figure before coming to their collective senses and seeing that while the wildly popular Mexican food chain may have stumbled, it’s still on the fast track.
So if you already own Chipotle stock, sit tight. And if you’re thinking of buying, there’s still time. Here’s why.
New Store Openings
Chipotle is first and foremost a growth stock. While it would have been better if revenues from its existing stores had grown faster, the fact is that most of Chipotle’s growth is coming from new store openings.
Today, Chipotle operates about 1,800 restaurants where you can sit down or get a supersized burrito to go. It opened 48 new restaurants in the past quarter alone and has opened close to 100 so far this year. And as far as I can see, it has a long way to go before it can saturate the market for affordable food in malls, rest stops, college campuses and Main Streets all over America.
For some perspective, McDonald’s (NYSE: MCD) has more than 36,000 restaurants around the world. I’m pretty sure I’m not the only one who can say I’ve set foot in Chipotle multiple times over the past month, but haven’t seen the inside of a McDonald’s in years, save maybe for a road trip pit stop.
Room to Grow
My point is not to discuss the merits of burgers and fries versus chips and guac. There’s a whole debate about how healthy Chipotle’s food really is. What’s clear however, is that Chipotle is tiny compared to many other fast-food chains. It has momentum and lots of room to grow.
As for the disappointing same-store sales, that is a blemish on an otherwise stellar quarter. Investors always watch same store sales closely for an apples-to-apples (avocado-to-avocado?) comparison of business this year and a year ago, looking just at stores, or restaurants, that were open both years.
For Chipotle, the same-store sales figure was even worse than the 4.3% growth shows … most of that growth reflects price increases that were instituted about a year ago and which seem to have alienated some customers. Clearly, some tweaking of the pricing model is in order.
There’s also a very risk of diner fatigue. One of the reason’s Chipotle has been able to grow so fast is that it’s fresh: Not only does it offer fresh ingredients in an industry that’s too long relied on processed food, but its whole concept of something that’s tastier than Taco Bell but cheaper than a formal sit-down Mexican restaurant is groundbreaking. It’s worth asking if the customers will stay after the fad wears off.
Some may not, but I think more will stick with its quality food and affordable prices.
With a price-earnings ratio of more than 47, Chipotle is not cheap. But with stocks, as with so much of life, you often have to pay for quality.
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