Chipotle Mexican Grill (NYSE:CMG) shares have soared 27% so far in 2014 and are trading close to 52-week highs. But, after looking at the company's recent results, more upside cannot be ruled out. Chipotle reported robust second-quarter results, exhibiting a considerable increase in both its revenue and profit, topping analyst expectations.
In fact, Chipotle's revenue for the quarter increased 28.6% to $1.05 billion from the year-ago period. Its net income also rose around 26% year over year to $110.3 million. Looking ahead, the trend is expected to continue due to Chipotle's smart moves.
Doing well in a difficult environment
Chipotle's results were mainly driven by new restaurant openings that led to an increase in traffic. An increase in the menu prices throughout the country also helped. This is a positive indicator for the company, as its strong results come at a time when other restaurant chains are striving to increase their sales amid a challenging economic environment.
During the quarter, Chipotle raised its menu prices as food costs are rising. To add to this pressure, the prolonged drought in the southern U.S. great plains reduced the country's cattle supply to the lowest in the last 60 years. However, this did not keep customers away from dining at Chipotle. The company is famous for its antibiotic-free meats and organic produce, which have made it a prominent name among teen and young adult diners.
Going forward, Chipotle is optimistic about its prospects, and has various expansion plans to power its growth. The company expects to open around 195 restaurants this year, which also includes expansion into new markets such as Duluth, Texarkana, Charleston, and West Virginia. This will drive more traffic and increase its revenue further.
Food quality, menu innovation, and customer-centric moves
But, as mentioned above, beef supply in the country is at its sixty-year low. Consequently, the company is unable to get sufficient beef that meets its high standards. Hence, for the time being, to fill the gap Chipotle is using conventionally-raised beef. To make its customers aware of this change, it has put up notices in its restaurants. Along with this, it's also sourcing grass-fed beef from Australia. With these customer-centric moves, Chipotle should be able to maintain customer loyalty as they will not feel cheated during constrained beef supply, since the company is making it clear what input it is using.
Chipotle is also strengthening its position in the organic food market with the launch of Sofritas, which is made with braised organic tofu. According to management, "When we introduced Sofritas, our aim was to create a dish that would appeal to not just vegan and vegetarian customers but all of our customers." Chipotle is now reaping the efforts of its hard work, as Sofritas has become one of the delicacies sought by both vegans and non-vegetarians.
As mentioned earlier, Chipotle's main strength lies in the quality standards of its food. Thus, its marketing program is based on a similar theme -- to make its customers more serious about the food they eat and as to where it comes from. In pursuance of this strategy, Chipotle has organized day-long food and music Cultivate festivals that have received a strong response from customers.
Focus on employee culture is another advantage
Chipotle's focus on cultivating a good employee culture is one of its strengths. The company promotes and encourages hard-working employees to boost their morale, and pushing them to work in a better and efficient manner. As a result, Chipotle organizes award ceremonies and conferences to educate and inspire its team. The company is pleased with its efforts, as its employees are stepping up their game to serve customers.
The efforts can be clearly seen during peak hours, when employees properly manage the long lines. This ultimately results in a better dining experience for customers, and they do not walk away from these long lines.
Valuation and projections
Chipotle did well during the previous quarter, and looking at its future plans, it can get even better. Currently, it has a trailing P/E of 63.19, which is quite expensive compared to the industry average P/E of 27.6. But, its forward P/E looks attractive at 39.14, reflecting that its earnings will improve in the future. Additionally, Chipotle is a cash-rich company, having a position of $804 million. Moreover, it doesn't have any debt.
Finally, over the next five years, its earnings are expected to grow at a compound annual rate of almost 24%, well-ahead of the industry average of 15%. Hence, despite trading at 52-week highs, Chipotle Mexican Grill is still a solid investment option.
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