Chipotle: A Winning Formula For 2012
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I knew I loved Mexican food for some reason and my love was reinforced when I was introduced to grilled vegetable burritos from Chipotle (NYSE: CMG). Chipotle has been a domestic growth story. As I discuss in this article, now that it has some domestic competition riding its coattails of success, it is now an international growth story.
Chipotle Was a Domestic Growth Juggernaut
Chipotle Mexican Grill now operates its fast-casual Mexican food restaurants in the United States, Canada, and England. The company now has over 1,200 outlets.
Steve Ells, founder and co-CEO, started Chipotle with the novel idea that fast food didn’t have to be bad for you. Chipotle has focused on fresh, high-quality raw ingredients, prepared nutritiously and delivered up in a distinctively inviting atmosphere. Key values of the organization focus on sustainably grown food and respect for animals, land, and farmers who produce the food. That same respect is carried over into the people and culture within Chipotle.
That kind of attitude seems to be carrying this hot stock, much like its sauce, to the lips and portfolios of many burrito lovers. Hitting the ground running at $45 a share in January 2006, Chipotle closed at just over $422 just six years later.
Chipotle courted McDonald’s (NYSE: MCD) during its humble beginnings when McDonald’s invested a minority interest in the company in 1998. With McDonald’s growing to become the largest investor by 2001, Chipotle was able to expand from 16 restaurants in 1998 to over 500 by 2005.
The initial public offering (IPO) on January 26, 2006 saw the share price increase due to high pre-IPO demand. In its first day of public trading the stock rose 100%. Boston Market’s initial public offering rose 143% in one day, even out performing Google’s initial offering. One would hope Chipotle does not go down the road Boston Market ventured onto. One day a meat loaf is simmering in the oven and the next the chicken’s flown the coop.
McDonald’s linked arms with Boston Market as well but divested both entities in 2006. McDonald’s parting gift from Chipotle was roughly a billion dollars – investing $360 million and cashing out with $1.5 billion.
Chipotle came out swinging but it took almost two years to break $100 a share just before the end of 2008. It was a fairly bumpy ride for the next two years bouncing between $60 and $100 though finally settling in at just over $200 at the end of 2010. The climb has been fairly steady since that time, erupting the burrito size to over $400 in March.
Rubio’s, a privately held company, is a close competitor headquartered in Southern California emphasizing fish tacos. It has 170 outlets in California, Arizona, Colorado, Utah and Nevada.
Baja Fresh Mexican Grill, also privately held, operates 256 restaurants in 29 states and recently opened a store in Burj Khalifa in Dubai. It too holds to the all fresh, no processed, can opener or microwaves allowed philosophy.
All of Chipotle’s restaurants are company-owned, rather than franchised which for the time being enables consistently higher quality standards and tighter reins over control. In 2010 they opened a location in London, England and this year the Eifel Tower will see a burrito.
In an effort to try something different Chipotle opened an Asian themed fast-casual restaurant named ShopHouse Southeast Asian Grill in Washington, D.C. It is following the same focus on fresh food that respects nature and animals. It’s good to know that management is not resting on its burrito laurels but staying abreast of innovative fresh ideas.
For now there is not much public competition for Chipotle. Other fresh Mex contenders are either privately held or owned by other major players, which to me is a testament to their profitability and growth prospects. Panchero’s Mexican Grill based in Iowa is privately held. Moe’s Southwest headquartered in Atlanta is operated by Focus Brands and Qdoba Mexican Grill is owned by Jack in the Box (NASDAQ: JACK).
McDonald’s maintains a strong investment at just under $100, and on a product basis, it has experimented with themed products in the Mexican food category. It is a significant possibility in my opinion that its products could catch fire in popularity and compete more directly with Chipotle's offerings domestically. Jack in the Box is an easier bite out of the wallet at just over $23 for investors, but Qdoba's store footprint is smaller at over 525 outlets and its locations are less conveniently located. Indeed, I do think Chipotle's store site placement team is top-notch, and that will bode well for the company not just domestically but also abroad.
Chipotle's Growth Lies Abroad
Most investors are familiar with the stellar growth trajectory of Yum! (NYSE: YUM), the parent company for KFC, Pizza Hut and Taco Bell, which trades at just over $70 and remains more of an international threat to Chipotle. Additionally, the other international brand, Burger King, has announced its return to the New York Stock Exchange though no one can predict where it will land. But neither competitor has the gas the Chipotle burrito puts out.
Chipotle may bounce along like a Mexican bean but the fourth quarter saw a 24% rise in profit with a very similar increase in revenues. Chipotle opened 67 new restaurants in the fourth quarter, reaching a total of 1,230 outlets. For 2012, the projection is for 155 to 165 new store openings.
Recession does not always spell hard times and the company has already begun to see that many international markets are even more insulated from recessionary pressures as international comsumes get their first tastes of convenient fast food beyond McDonald's. For Chipotle it has meant an increase in business as consumers still seek to satisfy their desire to eat out but cut costs. The burrito is being hailed as a nutritious alternative that many people are sinking their teeth into, both domestically and in foreign markets.
Many of the older fast food players like McDonald's and Yum! have strong markets in Asia which maintain their growth momentum. With Chipotle now branching out in new markets like London and Paris, as well as new ventures like ShopHouse, it appears there are still a lot of beans in this burrito. If the wind ever shifts toward Asia don’t make a run for the border, just grab a hold as that burrito may get even bigger.
While Yum!'s Taco Bell is no competitor, it has planted itself in Korea. Last year, I for one took a four hour bus ride to Seoul just to sink my teeth in a crunchy taco and a bean burrito. If there was a Chipotle Mexican Grill within a four hour bus, train or airplane ride I’d grab the next seat out of town to wrap my hands around that foil wrapped burrito. From an investment perspective, Chipotle is now an international growth story. Investors should view it as a Yum! heir-apparent to the international growth thrown now that it has outgown its domestic roots.
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