Does ShopHouse Justify Chipotle Mexican Grill, Inc. (CMG)’s Valuation?

After its price finally came down to earth in late 2012 (falling to under $250 from over $400 per share), shares of quick-serve burrito restaurant Chipotle Mexican Grill, Inc. (NYSE:CMG) have rocketed back toward the $400 level. Shares have jumped 23% year-to-date, even though the company’s same-store sales growthtotaled just 1% in the first quarter. Shares now trade at a premium to Valuentum’s fair value estimate ($338 per share is the high end of Valuentum’s fair value range).

With comparable store sales growth slowing, Chipotle Mexican Grill, Inc. (NYSE:CMG) most rely on new-restaurant expansion to drive revenue growth. Luckily, increasing the store count hasn’t been an issue thus far, and the firm remains on track to open 160-180 new restaurants this year alone. Still, total revenue increased just 13.4% year-over-year during the first quarter, and it appears as though the company’s revenue growth rate will fall to the mid-teens during 2013.

Source: Chipotle

Other cracks are beginning to form in the Chipotle Mexican Grill, Inc. (NYSE:CMG) story. Fierce competition from Yum’s Taco Bell appears to be slowing Chipotle’s pace of market-share expansion. With lower-priced substitutes available, Chipotle doesn’t have much room to raise prices—which should further stall same-store sales growth and limit margin expansion. Additionally, Valuentum believes the incremental sales growth from new store openings will begin to cannibalize existing locations (decreasing the marginal benefits of new stores to the firm’s top and bottom lines).

ShopHouse begins to expand…

Enter ShopHouse, Chipotle Mexican Grill, Inc. (NYSE:CMG)’s take on Southeastern Asian cuisine. The company’s current location in Washington, D.C. will be joined by two new stores in California over the summer, as well as a location in D.C.’s Georgetown neighborhood. The concept receives mostly positive reviews thus far (according to Yelp), and as we can tell from the image below, it is Chipotle-inspired.

Not surprisingly, the concept has started out slow, as it should: we’d be disappointed in a large nationwide roll-out of a concept that consumers aren’t crazy about. If Ron Johnson tested his J.C. Penney Company, Inc. (NYSE:JCP) changes, he might still have a job. From what we’ve gathered, we think the concept could be a hit. At the moment, there isn’t much healthy Asian-inspired fast-food available in the United States, so ShopHouse fills a void in the marketplace.