“From February 1, 2006 to December 31, 2021, Chipotle stock has returned roughly 3650% or roughly 7x the S&P 500 return of roughly 415%. Think about that for a minute, they make burritos, and a lot of them.”
COMPANY PROFILE
Chipotle Mexican Grill, Inc. (NYSE: CMG) is Cultivating A Better World by serving responsibly sourced, classically-cooked, real food with wholesome ingredients without artificial colors, flavors or preservatives. Chipotle had nearly 2,900 restaurants as of September 30, 2021, in the United States, Canada, the United Kingdom, France and Germany and is the only restaurant company of its size that owns and operates all its restaurants. Chipotle is ranked on the Fortune 500 and is recognized on the 2021 lists for Forbes' America's Best Employers and Fortune's Most Admired Companies. With nearly 95,000 employees passionate about providing a great guest experience, Chipotle is a longtime leader and innovator in the food industry. CMG has so much more growth to come. Below is an image of a new format, the digital ghost kitchen for walk up and delivery. Here’s a comment from management: “Our portfolio of approximately 300 Chipotlanes perform with the highest margins across the board, so we continue to evolve our restaurant design with formats such as the Chipotlane Digital Kitchen to best suit our growing digital business.” Pivoting to the higher margin models at scale. BTFD.
Style Factor Benefits
From a factor scoring perspective versus the other 199 brands in the brands index, here’s where Chipotle scores well as of 12/31/21:
91% strong price momentum
86% accelerating 1YR sales growth versus 3YR average
80% margin expansion
70% low debt to enterprise value
Opinion
Bill Ackman at Pershing Capital and their view on their 3.9% weight in CMG as of 12/31//2022
Chipotle continued its superb performance in 2021 driven by ongoing strength in digital sales and the recovery of in-store ordering. The successful business transformation led by CEO Brian Niccol and his team prior to the pandemic dramatically improved digital access and enabled the company to serve customers as they rapidly pivoted to order ahead pickup and delivery in 2020. These digital gains have proven resilient, with digital sales growth of 6% in the second half of last year even as in-store sales rebounded 37%, with the latter now approaching 90% of pre-pandemic levels.
CMG is an interesting stock for me. As a food snob who loves eating and making fresh-Mexican, the CMG bowls and burrito are average most of the time. But I don’t think most people care about their food the way I do. The reality is: this is the best game in most towns for quick, somewhat healthy fresh-mex, particularly if you don’t like the traditional Mexican food restaurants. This is a young person’s haven, the stores are usually full and increasingly, the stores are full, and the drive-up, take-out shelf is also full. Their digital app is probably the best I’ve seen from a user interface perspective, and they keep innovating new ways to serve customers. The best stocks in this category serve customers well, are very consistent at it and are in the middle of a significant store growth phase. That’s exactly where CMG is now. Its not cheap but I think its worth the price because growth and innovation is driving the bus. The stock has pulled back offering a much better entry point today.
During 2021, Chipotle achieved a significant milestone by generating average restaurant sales of $2.6 million, eclipsing the 2015 peak of $2.5 million and putting the company firmly on track to achieve management’s goal of more than $3 million. Same-store sales grew 19% in 2021, or 21% from 2019 levels, driven by the in-store sales recovery, key innovations including the quesadilla and smoked brisket, and menu price increases. Chipotle’s superlative customer value proposition continued to be evident in 2021 as the company was able to raise prices to cover inflation and protect margins while experiencing very little customer resistance. Chipotle’s most popular entrée, a chicken burrito/bowl, is still priced below $8.00 in most parts of the country, demonstrating the significant latent pricing power that can be deployed if the inflationary environment continues.
In early February, management raised their long-term unit growth outlook to include the potential for at least 7,000 restaurants in North America, up from the prior goal of 6,000 restaurants, with annual new restaurant growth of 8% to 10% in 2022 and beyond, up from 6.5% average growth in the last three years. These new goals reflect the success of small-town locations that are delivering returns at or above traditional locations, as well as the robust performance of the Chipotlane digital drive-thru format, which will be featured in over 80% of new openings and is currently in only 12% of the store base.
In addition to new restaurants in North America, Chipotle continues to enjoy a long runway to drive growth across the business through menu innovation such as the recently launched pollo asado, loyalty program enhancements, operating leverage with 40% incremental restaurant margins, and the potential for international expansion beyond Canada.