Chipotle Mexican Grill (NYSE: CMG) is the new Starbucks, or so it seems in New York City. Every corner you turn, there is a CMG restaurant and a line around the corner around lunch time. People have taken to this “fast casual” Mexican food chain, which now has over 1,200 units in more than 35 states. And while the authenticity of the food is debatable, the stellar stock performance is undeniable—up ~23% YTD. The company beat Q1 estimates and despite the significant stock price appreciation, we still view CMG as a top pick in the high growth casual restaurant space.
CMG reported Q1 EPS of $1.97, beating Street estimates of $1.93, as well as the best same store sales (SSS) numbers since 2006 of 12.7%. Of that 12.7%, 4.5% came from menu pricing (1% system-wide increase). Any menu price increases this year—we expect somewhere in the neighborhood of 2%— would help offset increases in food costs. From a cost perspective, we are concerned about rising commodity costs, but as mentioned above, we believe the menu price increases should ease investors’ worries. Management still expects mid-single-digit food cost inflation in 2012, which is unchanged from its two prior forecasts. Management has indicated that if food cost inflation reaches mid-single-digits this year, it would employ additional menu price increases.
Management maintained FY 2012 guidance, projecting “mid-single digits” for SSS growth. We, however, view this as a pretty conservative estimate given implied figures of 10% after taking out weather and leap year effects for Q1. We think ~10% y-o-y growth is attainable for the fiscal year, especially after the company noted that it had expending considerable effort to increase the number of customers served i.e., throughput. One of management’s priority initiatives is SSS improvement during peak lunch hour (12:00pm to 1:00pm), which exceeded the system-wide SSS improvement in Q1. Some estimates show that if each CMG unit added 10 customers per day, SSS on an annualized basis would increase by 1.9% and annualized EPS by $0.44, ceteris paribus.
Looking at growth prospects, management commented on improved real estate availability, which we view positively as a tailwind for domestic unit expansion. Construction of large-scale shopping centers has been lackluster but according to the company, standalone sites on the periphery of malls known as “off-mall pads” are seeing increases in supply. This translates to new construction revised upward to 36% of new restaurants in 2012, a six percent increase from 30% in 2010. This increase in off-mall pads will also benefit Panera Bread (NASDAQ: PNRA), which similarly targets off-mall pad sites for its new restaurants. CMG also outlined international expansion plans including three new units in London, one in Paris, and a couple in Toronto for the year. 2013 plans were not disclosed, but we think that CMG can accelerate Canadian expansion since consumers there are more familiar with the product and brand due to proximity to the US.
We believe CMG can realistically hit double-digit sales and EPS growth as well as expand new unit openings internationally above what management has guided. The company’s top-line growth story is unparalleled amongst its peers, bolstered by internal initiatives to increase menu prices and peak-hour throughput. Given our outlook for continued rapid growth and overseas expansion exceeding that of its peer group, we feel that a multiple above peers is warranted. Even among its high growth comps, CMG has set itself apart by generating great traffic stats and margin improvements. If EPS growth stays in the 40% range, we think it will support the premium that CMG currently commands. CMG trades at ~50.4x 2012 P/E, BJ’s Restaurants (NASDAQ: BJRI) trades at ~35.4x, PNRA trades at ~27.3x, Peet’s Coffee & Tea (NASDAQ: PEET) trades at ~40.7x, and Starbucks (NASDAQ: SBUX) trades at ~29.8x. We include PEET and SBUX in our comp set due to their high unit expansion growth. Billionaire Jim Simons’ Renaissance Technologies had nearly $300 million invested in CMG at the end of December (see Jim Simons’ top holdings). Mark Broach and Philippe Laffont are also among the hedge fund managers who are bullish about Chipotle.