Chipotle Mexican Grill: Why Corporate Culture Matters

| About: Chipotle Mexican (CMG)

Chipotle Mexican Grill (NYSE:CMG) seems to be firing on all cylinders. The company opened 28 new restaurants in the last quarter and increased their full year guidance to 110-120 new stores. Average restaurant sales were up significantly despite a broad market perception that the consumer is less likely to increase spending. When the quarter was announced the stock soared on the good news breaking to an all time high.

The fundamentals behind the company are truly inspiring. Corporate culture is a very integral part of the business as the company prides itself on its natural wholesome ingredients, responsible farming, community stewardship, and a stimulating work place. This culture is passed on to customers, who are more likely to go out of their way to stop at Chipotle instead of a competitor because of the values they share with the company.

These values are not always easy to implement and the company has struggled to find enough hormone free meat to supply their entire corporation, but they have been able to at least roll out organic beef market by market and have a goal of completing this rollout in the next few years. All of their chicken is considered organic and fruits and vegetables also are organically grown by select farmers. While this fanaticism about quality results in higher food costs, customers are willing to pay a premium, knowing they are getting a good healthy value. (an interesting question is whether this will remain true if the economy enters a recessionary period in the next year).

Workforce values are also key to the company and this category actually saves them money in the long run. Over the past year, CMG has implemented a “hire from within” campaign that has allowed them to promote line employees to be store managers for the new locations. This results in lower training costs and improves morale and productivity on the line. I applaud the company for the publicity surrounding this strategy as it has a tangible effect on the way customers are treated by more responsible aspiring employees.

The stock is trading at a fairly high multiple, assuming the consensus is correct at $1.71 per share for 2007. However, the growth the company has shown has been superb, and it looks as if the opportunity remains for several more years of exciting expansion. Not only are more stores being planned and opened, but the throughput in existing stores is picking up as people become more aware of the concept. Nearly 400 change machines have been installed in stores which help speed up the line in high volume stores during peak periods. This can have a profound impact on number of customers served, and the management is constantly tweaking ideas for how to cut down on line time so customers are served quickly and store capacity is increased.

I expect the stock to continue to trade well and think the weakness we are seeing this week (corresponding to a market consolidation) gives investors a chance to pick up what they may have missed after the stock got moving following the quarterly announcement. For those a bit nervous about the multiple, one could sell calls against a long position as the premiums are high and the added layer of protection reduces some of the risk. I should add that I am long the stock in our fund and continue to look for ways to responsibly increase my position.

Disclosure: Author has as long position in CMG

CMG 1-yr chart