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Chipotle Could Double the Number of Restaurants in the Long Run

publication date: Apr 26, 2021
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author/source: Brian Nelson, CFA

Image Source: Valuentum

By Brian Nelson, CFA

"Letting winners run” is an important dynamic behind the concept of compounding, and it often makes having a long-term horizon necessary. I talk about how we think about “letting winners run” in the following video, “Valuentum’s Brian Nelson on the Latest Howard Marks’ Memo: “Something of Value.” Compounding returns is one powerful aspect of investing.

That said, we can understand why it may be confusing to see us continue to highlight ideas in the simulated newsletter portfolios that may be trading above the high end of the fair value estimate range, but per the Valuentum methodology, we would only look to remove them when their shares start to roll over in a meaningful way (negative momentum) while in overpriced territory (above the high end of the fair value estimate range).

This is not the case with Chipotle (CMG). The high end of our fair value range for Chipotle stands at ~$1,790 per share, offering considerable valuation upside potential on the basis of where it’s trading at the moment ~$1,470. During the past year, shares have advanced nearly 70%, so it may be obvious that we like the value and momentum dynamics behind the restaurant--and we’ll be keeping it in the simulated Best Ideas Newsletter portfolio.

On April 21, Chipotle reported first-quarter 2021 results, and there was nothing in the report that would prompt us to change our long-term thesis. During the period, revenue advanced 23.4%, while comparable restaurant sales jumped 17.2%. Digital sales grew an astounding 133.9%, and digital accounted for more than 50% of sales in the quarter. Adjusted diluted earnings per share soared 74%, to $5.36 in the first quarter.

“Chipotlanes” (drive-thrus) have been game-changers for Chipotle during this pandemic, as the company rapidly shifted to accommodate COVID-19 conditions and changing consumer preferences. As with Domino’s (DPZ), Chipotle is at the forefront of "digital," and it showed just how well its business model will work in a world that continues to order online. Though management didn’t provide an outlook for 2021, we continue to expect big things from Chipotle in the years ahead.

Here’s what CEO Brian Niccol had to say on the conference call:

Chipotle is off to a promising start in 2021 which gives me optimism for the rest of the year. There's still uncertainty related to COVID, but as more people become vaccinated, including many Chipotle employees, I'm hopeful we're getting closer to brighter days ahead. In fact, all but about 20 of our restaurants are now open with 92% of them offering in-restaurant dining with capacity limitations.

Not surprisingly, comparable restaurant sales were the highest during the month of March as we had easier comparisons. And I'm pleased to report that April is off to a good start. These results highlight that our key strategies continue to resonate with guests and position us to win today, while we create the future.

Let me now provide a brief update on each of these strategies, which I believe will help fulfill our long-term vision of more than 6,000 restaurants, AUVs (average unit volume) above $2.5 million and restaurant level margins above 25%.

These are, one, making the brand visible, relevant and loved; two, utilizing a disciplined approach to creativity and innovation; three, leveraging digital capabilities to drive productivity and expand access, convenience and engagement; four, engaging with customers through our loyalty program; and five, running successful restaurants with a strong culture that provides delicious food with integrity while delivering exceptional in-restaurant and digital experiences.

Chipotle currently has ~2,800 restaurants in the US, Canada, the United Kingdom, France and Germany, and it expects to open ~200 restaurants in 2021, a number of openings that we think is achievable even with the possibility of permit delays stemming from COVID-19 pent-up demand.

Here, Chipotle is a company with 1) an opportunity to double the number of restaurants in the long run (management’s long-term vision is for 6,000 restaurants), 2) grow comparable store sales at a nice clip along the way, while 3) innovating with new menu items (and potentially rolling out a breakfast daypart offering), all of which are in tune with customer preferences via digital. 

Having Brian Niccol, who turned the fortunes of Yum Brands' (YUM) Taco Bell around before joining Chipotle, at the helm also helps.

Concluding Thoughts

Chipotle’s first-quarter results were solid, and we’re sticking with the idea in the simulated Best Ideas Newsletter portfolio. The company’s long-term total restaurant opportunity is tremendous, and we view its digital initiatives as top-notch as it continues to grow comparable store sales nicely. With one of the most innovative CEOs at the helm, Chipotle’s shares continue to be enticing, in our view.

Chipotle's 16-page Stock report (pdf) >>

Tickerized for CMG, DPZ, YUM, YUMC, GRUB, DASH, UBER

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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, and IWM. Brian Nelson's household owns shares in HON, DIS, HAS. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.

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