Chipotle Mexican Grill (CMG) is a very well managed company that has found a niche.
Their average bill is higher than other similar establishments. There are a number of reasons for this. They are currently located in college towns and high-income areas, where price is not a problem. They speak to the desire of these populations to have what Chipotle characterizes as "Food With Integrity" (I'll discuss this later). Their menu is set so you cannot get out without spending a minimum of six or seven dollars for just one burrito, no drink. At McDonald's (MCD) I can get four or five grilled chicken tortilla wraps for about the same price - and two make a comparable meal for me, costing $2.98 or less.
Their higher bill leads to much higher sales per restaurant, generally by a factor of three or four compared to other chains. At this point, they have cherry picked the locations that will support this method of operation. This means dollar sales per restaurant will begin to slow as new locations come on line.
Looking at growth for this fiscal year using the 4/19/12 Chipotle press release for first quarter 2012 and simple long division, they have 1262 restaurants presently and plan to open 155-165 this year. 165 divided by 1262 times 100 equals 13.1% growth in new restaurants. They also mention in this press release mid-single digit comparable restaurant sales growth and food inflation of mid-single digits. This is a significant slowing of growth. I calculate a past compounded growth rate of over 60%. This uses the present stock price of over $400 and their $22 IPO price. Down to about 13% growth does not deserve the current premium that the stock is commanding.
I believe the company realizes that this concept has reached a plateau with past growth levels. The clever solution is to come out with another chain that will not cut into sales at current Chipotle locations. This is Shophouse, their Asian themed restaurant, where they can add the tofu crowd without impacting Chipotle sales. (One restaurant opened and a second planned for this year.) Future rapid growth will depend on success of this concept, and it will take a number of years to roll out. So for the really long run (2017-18), I like CMG.
Short term I believe the stock to be way overvalued. And while Jim Cramer screams buy, his charitable trust does not appear to own any. My near term target based on technical analysis is about $350/share.
While this is a well-managed business, it is a business. When they write about "Food With Integrity" on their website they say, "It means that whenever possible we use meat from animals raised without the use of antibiotics or added hormones" and "And it means that we source organic and local produce when practical" (added emphasis is mine). They sensibly will not stop selling burritos if they can't get organic produce or hormone free meat. But, they have been up front and explained to you that you may not be getting these things.
The slogan has gotten them much free publicity. They also effectively use Youtube, Yelp, and other free sites for free advertising. I am assuming free - it would certainly be worth their while to buy the excellent write ups and Youtube testimonials that they get (many it appears) from college students.
They have also had a past problem with the hiring of illegals. Again, it's a business and looks to keep labor costs low.
Disclosure: I am short CMG, and long CMG puts.
