3 Lame Reasons You're Missing Out on Chipotle

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

On April 13, 2012, Chipotle Mexican Grill (NYSE: CMG) hit its all-time high of $440 per share. This run-up from its 2006 IPO earned investors an over 900% return. However competition and valuation doubts sent these investors running. Shares tumbled over 40% in six months. That was then.

This is now. Shares bottomed out October 24 around $234 per share. Since that time shares are up over 70%. Most recently, the company reported red hot earnings that included an 18% increase in revenue, 8% increase in net income, and 44 brand new restaurants for the quarter.

When the panic surrounding Chipotle reached its climax in October, it was the perfect time to invest. Here are three lame reasons -- reasons I've actually heard -- that are causing some to miss out on the comeback.

1. I don't like Chipotle's food.

Whether or not you personally like Chipotle's food is irrelevant. Fact is many people adore this burrito-centric cuisine. While no metric exists to measure consumer taste bud stimulation, we can analyze consumer preferences through comparable sales.

In the most recent quarter, comp-sales were up 5.5% on increased traffic. Steady increases like this shouldn't be taken for granted.

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>2nd Quarter 2013</strong></td> <td><strong>2nd Quarter 2012</strong></td> </tr> <tr> <td>Chipotle</td> <td>5.5%</td> <td>8%</td> </tr> <tr> <td>McDonald's</td> <td>1%</td> <td>3.7%</td> </tr> </tbody> </table>

Currently McDonald's (NYSE: MCD) is facing some comp-sales pressure, particularly in France and Germany due to the European financial situation. In these two countries, same-store sales are declining. Same-stores sales also declined 6% in China due to the bird flu scare. And in the US, management is predicting flat same-store sales until year-end. As it often does, McDonald's is seeking to combat these declines with more value-menu items. Keep an eye on coming quarters to see how effective this is.

Chipotle is making a lot of satisfied customers. The food keeps everybody coming back for more.

2. Chipotle's food is too expensive.

Yeah, the food may be expensive. And frankly, management already knows this, as evidenced in the risk section of its annual report:

We may not persuade customers of the benefits of paying our prices for higher-quality food.

Management knows that the food is pricey, but they believe customers will pay more for its food than a competitors. Chipotle has long toted its "Food With Integrity" mantra. Food with integrity means buying from local farmers, using hormone-free meat, and including organic vegetables. This strategy is quite different from McDonald's aforementioned value pricing strategy, and targets a specific consumer audience.

That's why you don't need to fear Taco Bell, a product  of Yum! Brands (NYSE: YUM), having impressive growth and posing a serious threat to Chipotle's business. Taco Bell has grown comp-sales in each of the last six quarters, including 2% in the most recent. 

Yet the supposed "Chipotle-killer" menu -- Cantina Bell -- is not delivering for Taco Bell. Rather, the main growth driver are the Doritos Locos Tacos. These tacos boosted same-store sales 13% in the first quarter they were available, and sold 100 million (!) in the last quarter alone. This further proves what Chipotle's management said last year, "We have a different customer base and very loyal customers. What’s more, the food we serve is very different than Taco Bell." 

Taco Bell appeals to its crowd which consistently boosts comp-sales -- a trend I expect to continue. While the novelty of Doritos Locos tacos may wear off sometime soon, Taco Bell is already preparing the next customer-pleasing promotion, namely by offering breakfast starting in 2014. This could be a huge boost when fully rolled out.

While Taco Bell's crowd enjoys Doritos and breakfast, Chipotle's customers have bought into the higher prices of Food with Integrity. For these customers the food is not too expensive.

3. How many restaurants does the world need?

I'm not sure how many the world needs. I'm more sure on how many it's going to get. Currently, the restaurant count sits at 1,502 locations. A double from here is likely.

First, things are still full-speed ahead with Chipotle's US growth.

<table> <tbody> <tr> <td> </td> <td><strong>1Q 2012</strong></td> <td><strong>2Q 2012</strong></td> <td><strong>3Q 2012</strong></td> <td><strong>4Q 2012</strong></td> <td><strong>1Q 2013</strong></td> <td><strong>2Q 2013</strong></td> </tr> <tr> <td><strong>Restaurant Openings</strong></td> <td>32</td> <td>55</td> <td>36</td> <td>60</td> <td>45</td> <td>44</td> </tr> </tbody> </table>

Chipotle is averaging 45 new locations every quarter with no signs of slowing down. This year the company looks to open around 180 new locations total.

Second, international expansion is just ramping up. 

<table> <tbody> <tr> <td><strong>Country</strong></td> <td><strong>Locations</strong></td> </tr> <tr> <td>Canada</td> <td>5</td> </tr> <tr> <td>England</td> <td>6</td> </tr> <tr> <td>France</td> <td>1</td> </tr> <tr> <td>Germany</td> <td>0</td> </tr> </tbody> </table>

In Europe, there are two more restaurants currently in the works -- one in Frankfurt and one new location in Paris. Interestingly, Chipotle is now in three European countries, but only three cities: London, Paris, and Frankfurt. This means that not only is there plenty of room to grow throughout the continent, but also within the countries it's in right now. 

Finally, Shophouse is on the move. This new restaurant chain -- completely owned and developed by Chipotle -- just opened its second location. This Hollywood location complements the first location located in Washington, DC. Two more locations are in progress right now, and four additional locations are slated for this time next year. Consumers are receiving this new chain well so far, and this could turn into a respectable chain in its own right in the future.

Conclusion

Don't let these three lame arguments keep you out of Chipotle. Chipotle is one of those rare opportunities that only comes around once in a while. While the stock is edging back up towards all-time highs, there is still plenty of reason to get in.

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Jon Quast has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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