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Chipotle Mexican Grill, Inc. (CMG): The Practically Perfect Pasta IPO

Margins and Growth

Margins at Noodles are comparable to the sector favorites until we get to operating margins. The cost of sales, labor and occupancy are all in line with the investor-favored concepts including Chipotle Mexican Grill, Inc. (NYSE:CMG), BJ’s Restaurants, Inc. (NASDAQ:BJRI) and Panera Bread Co (NASDAQ:PNRA).


Gross #1 margins are cost of sales only

Gross #2 margins include labor.

Of the four, Noodles has the lowest operating and net margins and will need higher numbers to make them a great investment. Noodles total gross margins (food, beverage, packaging, labor) are in-line with their peers. It’s operating costs and interest expense that are killing the net and operating margins.

Operating expenses cover a lot of territory including marketing, administrative, occupancy, depreciation, pre-opening expense and a catchall called “other restaurant operating costs”. For most of these companies, occupancy  expense (largely rent) is separated from other restaurant operating costs. That allows us to see if there is a built-in advantage for any particular chain in rental expense. BJ’s Restaurants, Inc. (NASDAQ:BJRI) combines occupancy and other operating expense and occupancy percentages cannot be calculated.

Occupancy as a percentage of revenue

Occupancy costs are over 3% higher than Chipotle. Every little bit hurts their margins when comparing to the best in class.

Combined occupancy costs/other operating expense percentages:

While some of the operating costs are within a few percent of each other across these companies, high “other operating expenses” for  BJ’s. Panera Bread Co (NASDAQ:PNRA) and Noodles creates lower operating and net margins. Part of that expense is restaurant supplies that includes tableware for sit-down dining. Chipotle has no such expense and it counts the expense of its lower cost food packaging in cost of sales, making their operating costs low. Panera’s low combined expense is especially impressive since they also have higher cost  restaurant supplies for sit down dining.

Why go on and on about this? Noodles has the highest expense and the lowest margins. What we hope for if we invest is they will be forced to be competitive (to make investors happy and the stock price going up) in the fast casual space. Margins will have to expand and cutting operating expense is a place to start. It obviously can be and is done successfully at Chipotle and Panera Bread Co (NASDAQ:PNRA). With the CEO and COO backgrounds at McDonald’s and Chipotle Mexican Grill, Inc. (NYSE:CMG), they may be able to make it work.

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