Chipotle's Recent Quarter Offers Clues to Consumer Behavior
Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is unnerving to watch a stock like Chipotle Mexican Grill (NYSE: CMG) go down almost $90 or nearly 24% in one day, but it also forces me to take a closer look at a stock that I have been invested in for over three years. I am a big fan of the giant burritos and the fresh lightly salted nachos served in a brown paper bag. Considered to be on the high-end of the quick-food market, the feel-good health story of antibiotic and hormone-free, naturally raised beef, chicken, and pork and chain-wide recycling efforts keep even the most peripheral tree-huggers coming back for more. Chipotle’s revenue slowdown this last quarter is enough to shake even the most confident investor. Are consumers being drawn to a lower priced menu from McDonald’s (NYSE: MCD) who recently expanded their dollar menu choices or YUM! Brands’ (NYSE: YUM) less expensive spicy offerings from Taco Bell in lieu of the average $10 bill at Chipotle or will they still pay up for heathy food options?
Healthy Consumers Seek Value
The overall trend down in consumer spending since April has eerily made its way into all corners of the economy while the current earnings season has put the stock market on sale for value searching investors. Additionally, lower fuel prices should have spurred on spending in all areas of the U.S. economy (call it stimulus), but hasn’t and has investors selling many normally strong performers to lock in gains ahead this wave of poor quarterly announcements. One exception, Panera Bread Company (NASDAQ: PNRA), a restaurant with a constantly changing healthy menu and solid quarterly earnings growth of 24%, gives consumers a great quick food option and seems to be bucking the downward trend. As mentioned in this video from the MarketFoolery podcast, you won’t find yourself locked into the $10 purchase you do when visiting Chipotle. You can purchase a bagel and coffee if you are looking to spend a little less. Certainly this is an attractive draw for today’s cash-strapped consumer looking for quick healthy food at a good value. Whole Foods (NASDAQ: WFM), considered by some the poster child for healthy choice supermarkets, also faired well in its most recent quarter with EPS in line with the high estimate of $0.63 and profit up 32%. This could be a clue that people are still willing to pay up for healthy choices, but are saving money by preparing and consuming healthier choices at home. It could also be a result of Whole Foods implementing their goal of lowering prices for the very real value-conscious shopper.
The Real Cost of Choice
As a consumer of fast foods of all kinds, I am not the poster child for healthy choices, but I appreciate that the choice is not only there but is mine to make. If the consumer is beginning to trade down to lower-priced “healthy” menu options, there is a give and take that investors need to recognize. As someone who has sampled the fast food market for healthy choices, I know there are decent salads from Wendy’s and McDonalds at around the $5-6 range. Wendy’s has also done a good job of offering healthy side options (other than fries) by including baked potatoes, side salads, fruit, and milk on their menu. However the real cost in these lower priced options isn’t always obvious. Consumers are giving up the naturally raised, anti-biotic and hormone-free, organically and locally grown, family operated, recycled products which may be exactly why people will keep supporting Chipotle even during this slow period.
Healthy Investors Seek Value
It is true that Chipotle stock was one of those Wall Street “darlings” priced for perfection with a P/E near 60. Now a little cheaper with a P/E just over 35, and the average P/E in the sector closer to 21, Chipotle may still be priced a little high. But their slightly higher P/E is warranted because of their tremendous growth rate. Management has reiterated year-end projections so I am tempted to nibble at this stock again with a current PEG just under 1.0. I also wouldn’t be afraid to pick-up some Panera or Whole Foods on a slight dip in price to round out the “healthy” sector as both seem to be reasonably valued at current PEG’s of 1.3 and 1.6, respectively. While Chipotle’s core company fundamentals haven’t changed, I’m paying attention to the slight change in consumer behavior (traffic). Their growth strategy of adding additional restaurants while sticking to their “food with integrity” (albeit more expensive) will position the company for a nice uptick after the election and buy years of loyal customers. I long for the days when we can get back to eating a healthy dose of organic burritos, wrapped in recycled aluminum without the guilt of paying up a little (or the guilt of paying down). Maybe the healthier choices will pay “dividends” later in life too.
Dubbles owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, Panera Bread, and Whole Foods Market. Motley Fool newsletter services recommend Chipotle Mexican Grill, McDonald's, Panera Bread, Whole Foods Market, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.