Chipotle Mexican Grill Stock: Reasons for Optimism

Chipotle Mexican Grill (NYSE: CMG) has emerged as one of the strongest players in the quick-service restaurant industry.

The company has been consistently performing well with positive earnings surprises in seven out of its past eight quarters. Management’s ability to switch to digital sales during pandemic has led to a superior result.

I am bullish on the stock based on its fundamentals and future growth prospects from a long-term perspective. From a technical standpoint, the stock is trading above its 50- and 200-day moving averages, reflecting a bullish sentiment.

CMG owns and operates 2,900 restaurants in the U.S., the U.K., France, and Germany. The company focuses on providing high quality food (without artificial colors, flavors, or preservatives) at a reasonable price. This is its key differentiating factor.

Impressive Comparable Sales Growth

While most of its competitors experienced a decline in comparable sales, CMG managed to increase sales by 1.8% in 2020. Same store sales increased 20.8% in the first nine months of 2021.

Strength in digital orders, along with a recovery of in-restaurant services and new menu items spurred top-line growth. Q4 2021 comp sales should be on a higher end of management’s guided range of low-to-mid double-digit growth, backed by holiday season and fewer restrictions.

Digital Sales, Menu Innovation

Digital sales have been a major growth accelerator, accounting for 42.8% of total sales in Q3 2021. Currently, about 65% of guests use in-restaurant as their main access point, nearly 20% use digital as their primary channel, and the remaining 15% use both channels.

Given the higher margins and cost benefits associated with digital sales, CMG has built 284 Chipotlanes as of September 30, 2021. The company plans to more than double the number of Chipotle restaurants in North America as it provides more flexibility and faster service to customers.

Several loyalty reward programs are further supporting digital sales. The company now has more than 24.5 million members in these programs in comparison to 19.5 million in 2020, and 9.5 million members in 2019.

Another initiative has been menu innovation. Between 2019 and 2021, Chipotle introduced five new menu items – the Hand-Crafted Quesadilla, Cilantro-Lime Cauliflower Rice, Carne Asada, Supergreens Salad Mix and Queso Blanco.

All of these gained customer acceptance, and were successfully rolled out on a national scale. Plant-Based Chorizo is currently being tested in a couple of markets.

Exploring New Markets

In order to expand, the company is exploring opportunities in Canada and Western European markets. Management noted the restaurant economics (AUVs and margins) of Canada to be equal or above those in the U.S. As such, several restaurants are scheduled to be launched in the upcoming quarters.

In Western Europe, CMG is in the early stages of development. Management seeks to learn, iterate, and finally validate expansion in this market.

Impressive Operating Margin

The operating margin expanded 772 basis points to 11.7% in the first nine months of 2021, from 4% in the prior year.

Menu price increases along with higher sales supported margin growth.

However, a spike in food costs, increased labor expenses and higher marketing expenses should compress margins for the Q4 2021. Margins are expected to improve in the coming quarters as the restaurant level average unit volumes increase, and CMG can further increase prices.  

Healthy Balance Sheet

The company maintains a pristine balance sheet with $1.2 billion in cash and zero debt. It also has a $500 million of unused revolver facility.

Higher cash flow allows CMG to carry its capex plans and enhance shareholder value through opportunistic share repurchases. The company remains on track to open at least 200 restaurants in 2021, including 75% with Chipotlane (versus earlier expectations of 70%), despite labor and equipment shortages.

As of the end of Q3 2021, $209.8 million remained available for share repurchases.

Wall Street’s Take

Turning to Wall Street, CMG has a Moderate Buy consensus rating, based on 15 Buys and seven Hold ratings assigned in the past three months. The average CMG price target of $1950.90 implies 18.4% upside potential

Investment Conclusion

CMG has been one of the few companies in the quick-serve industry to deliver superior returns even during the pandemic. The company remained on the track with its capex plans and maintains a zero-debt balance.

As the economy is opening, in-restaurant service is picking up along with its very strong digital sales business. Although margins are expected to be pressured by higher labor and food costs, higher volumes should support its growth.

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Disclosure: At the time of publication Sakshi Agarwalla did not have a position in any of the securities mentioned in this article.