On April 13, 2012, Chipotle Mexican Grill, Inc. (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 Mexican Grill, Inc. (NYSE:CMG) 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 Mexican Grill, Inc. (NYSE:CMG)’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.
|Company||2nd Quarter 2013||2nd Quarter 2012|
Currently McDonald’s Corporation (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 Corporation (NYSE:MCD) is seeking to combat these declines with more value-menu items. Keep an eye on coming quarters to see how effective this is.
Chipotle Mexican Grill, Inc. (NYSE:CMG) 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
Management knows that the food is pricey, but they believe customers will pay more for its food than a competitors. Chipotle Mexican Grill, Inc. (NYSE:CMG) 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 Corporation (NYSE:MCD) 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, Inc. (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 Mexican Grill, Inc. (NYSE:CMG)’s customers have bought into the higher prices of Food with Integrity. For these customers the food is not too expensive.