Chipotle Mexican Grill (NYSE:CMG) is expanding the reach of its brand by selling organic-cotton hoodies, organizing festivals, and supporting a dark comedy video series focusing on an evil PR guy appointed to defend industrial farming.
Does Chipotle have what it takes to become a lifestyle brand? Should investors care?
Chipotle as a Lifestyle Brand
The chain witnessed impressive growth for several years by offering a menu that spoke for itself. Currently, the company's competitors such as Yum! Brands (NYSE:YUM)'s Taco Bell chain are viewed as encroaching on Chipotle's success. According to Bloomberg data, the company's revenue growth is expected to reduce to 20% in 2012 and 15% in 2014 as compared to 24% growth in 2011. Hence, the company is creating a new lifestyle brand to influence its customers who have a trust in sustainability. But it is an extraordinary step for a restaurant chain, the likes of Abercrombie & Fitch (NYSE:ANF) and Harley-Davidson (NYSE:HOG) have done similar kind of things for past years. The lifestyle brand represents how people tend to define themselves.
Bill Chidley, a Senior Vice President at Interbrand Design Forum said, "It's new territory for a restaurant brand. It's ambitious, but I don't think it's implausible that they could become a lifestyle brand." He also said that the lifestyle brand expresses the company's values.
According to Bloomberg, among 30 analysts who follow the company, 73% of them recommend a hold or sell as compared to 52% of them in March. The company was formed as a result of a spin-off from McDonald's (NYSE:MCD) in 2006, and is now trading at a lower premium as compared to its peers.
Also the company's expansion rate is reducing as it is planning to increase its store count during the year by 13% as compared to 15% last year. Due to this slow growth, the company has started selling catered food at its Colorado locations and plans to expand this service at its other stores during the year. According to Nick Setyan, an analyst at Wedbush Securities, the company should spend more money on its marketing activities.
More than three years ago, the concept of organic line of clothing was introduced when Mark Crumpacker, the Chief Marketing Officer of the company, realized that the employee's uniform needed to be updated. He also said that, "It matched almost exactly with our food with integrity mission. Everything we're doing should line up this way." They hope to blend fashion with sustainability.
In 2011, the new uniform was introduced for the employees and a consumer line with hoodies, T-shirts and canvas totes was introduced on the company's website in 2012
The company has increased its expenditure on advertisement while earlier it believed in word-of-mouth advertising and free food giveaways to increase customer interest. In 2011, the company spent 1.4% of its sales that is approximately $31.9 million on marketing and advertising whereas it planned to spend 1.6% of its sales on marketing in 2012. The company has also increased its expenditure on its Cultivate festivals where it brings together bands, craft-beer brewers and celebrity chefs.
Let's say you believe that people really want to build their lives around the burritos they eat. I know it's, uh, hard to swallow, but let's pretend.
When looking at valuations of other restaurants, Chipotle is expensive. It is also pricey relative to lifestyle brands:
EPS Growth Next 5 Years
Burger King Worldwide
Chipotle Mexican Grill
Abercrombie & Fitch
Whole Foods Market
Chipotle has the highest price-to-sales ratio on this list. Among restaurants only Burger King has a higher price-to-earnings ratio, and among lifestyle brands only Abercrombie & Fitch exceeds its price-to-earnings ratio. So even if it is successful in transforming itself into an all-encompassing way of life, Chipotle would still be a pricey stock.
Investors would be better off investigating other stocks on this list that trade at lower valuations like Harley-Davidson or Darden. They are less pricey alternatives to Chipotle, regardless of the success of its transformation.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.