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Boorito Shows Why Chipotle Shorts Should Be Afraid

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Each Halloween Chipotle (NYSE: CMG) runs its Boorito event, where a diner in costume can pick up a burrito or another Chipotle entrée for $2. The Boorito promotion has directly impacted Chipotle's financial results in the past, although the restaurant runs this promotion to gain visibility that directly impacts higher future sales. Boorito also highlights Chipotle's operational and marketing advantages, which show why shorts might have underestimated this restaurant.

High Volume

Boorito shows that Chipotle can still pack its restaurants. Chipotle gave away burritos in 2009, but this Halloween promotion eventually became so popular that it cut into Chipotle's margins. Chipotle started charging $2 a burrito in 2010. In the Chipotle Q4 2010 earnings call transcript, CFO John Hartung explained that the company's operating margin increased by .7% to 11.2% for the quarter partially because diners no longer received free burritos, which produced around half of the operating margin improvement.

On the Boorito Facebook page, Chipotle explains that it will donate up to $1 million from its Halloween sales, so this restaurant has to serve at least 500,000 diners that day to reach this goal. Chipotle announced that it met this target in 2010 and 2011 and donated $1 million each year, and my local Chipotle was packed on Halloween, so the 2012 goal may have been met. Yahoo! Finance states that Chipotle has 1350 restaurants, so Chipotle had to serve over 370 diners per restaurant during Halloween afternoon and evening to hit the goal.

Health Appeal

In 2010, Chipotle donated its Boorito proceeds to the Jamie Oliver Food Revolution, and in 2012 Chipotle selected its Chipotle Cultivate Foundation as the recipient. These donations bring Chipotle goodwill, and showcase Chipotle's health brand. Chipotle's drink cups proclaim its efforts to work with local suppliers as well, which helps the restaurant offer fresher food. Ashley Dean, at ColoradoDaily.com, reported that Chipotle also holds the Chipotle Cultivate Festival, a free event to support its Chipotle Cultivate Foundation. The Chipotle Cultivate Foundation helps raise funds for family farms.

Chipotle has added more posts on its Facebook page during October in favor of California's Proposition 37, which requires genetically modified food to be labeled as such. The restaurant also explains why it supports Proposition 37 on its own web site, while emphasizing major chemical companies' opposition to the ballot measure. Chipotle recognized that its support for this measure could make its customers happy and promote its own food quality appeal.

Viral Marketing

Diners who support healthy food initiatives may go out of their way to shop at restaurants like Chipotle that meet their goals. These diners may also tell their friends about Chipotle's actions, creating a viral marketing effect. The Boorito promotion offers such a big discount that it could also have viral marketing implications for Chipotle. A diner's friends probably appreciate the chance to get Chipotle burritos for $2, so the diner has an incentive to share this Halloween offer. The costumed diners also create a spectacle that helps attract a crowd.

Valuation

The Boorito promotion highlights several reasons why Chipotle deserves a premium price, but this restaurant looks a lot cheaper now, although it still isn't a bargain. Both Chipotle and Panera (NASDAQ: PNRA) had forward P/E ratios of 24 on Halloween, but Chipotle had a PEG of 1.29 and Panera had a PEG of 1.48, making Chipotle look cheaper than the bread seller. Chipotle also reported 18.4% higher revenue last quarter, which surpassed Panera's 16.8%. Chipotle seems like it comes out ahead in this comparison.

Yum! Brands (NYSE: YUM) has a lower forward P/E ratio at 19, which is still a premium valuation, and a PEG of 1.61. Yum! reported 9% revenue growth last quarter. Yum!'s higher sales figures show that its updated Taco Bell menu might have attracted some diners away from Chipotle after all, as David Einhorn controversially argued. Yum! also plans to add more restaurants in China, although Wall Street Journal reporters Ben Fox Rubin and Annie Gasparro explain that a slower Chinese economy limited Yum!'s recent growth. Chipotle still looks like it offers more growth potential than Yum!.

Chuy's (NASDAQ: CHUY) has an even higher growth premium right now, with a forward P/E of 38 and a PEG of 1.69. Although Chuy's reported 32% revenue growth last quarter, strongly surpassing Chipotle's figure, Chuy's financials show several major weaknesses. Chuy's has negative $9.9 million free cash flow, $84.4 million in debt, and a $4.6 million cash balance. Chipotle has $573.9 million in the bank, $3.6 million in debt, and $220.8 million free cash flow, so coming up with the funds to add more restaurants shouldn't be a problem.

Takeaway

The Boorito event shows that the original reasons why investors bought Chipotle are still there. Chipotle can still serve lots of diners quickly, it can still run effective viral marketing campaigns, and it still stays up to date on health food trends. Chipotle was more expensive earlier this year, so it looks like a much better deal now.

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enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Motley Fool newsletter services recommend Chipotle Mexican Grill and Panera Bread. 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.

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