The CEO of Chipotle has made a bold statement on growth. Is it time to get excited?
Mexican Grill Chipotle (NYSE: CMG) has been one of the most successful catering concepts in recent memory, having pioneered the fast-casual category by serving burritos, bowls and tacos using real ingredients in a sustainable way. Sales have more than tripled since 2010, while the total number of stores increased from 1,095 ten years ago to 2,803 in the first quarter of 2021.
But CEO Brian Niccol believes the company still has a long way to go. His comments during the recent Piper sandler Consumer Marketplace Conference should certainly grab the attention of shareholders. Read on to find out what he said and what exactly it means for investors.
Image source: Getty Images.
The outlook is improving
Niccol mentioned that Chipotle would now “start talking about $ 3 million, 3.5 million AUV (annual unit volumes)”. This is a significant increase from a previous AUV target of $ 2.5 million, which he highlighted no later than the call for first quarter 2021 results in April.
The confidence to raise the bar even higher stems from Chipotle’s massive digital success during the pandemic. In each of the last four quarters, sales through digital channels have more than doubled, with the second and third quarters of 2020 increasing by more than 200%. Chipotle now has 21 million rewards members, quite a feat considering the program launched just over two years ago.
Management believes that returning meals on site will not cannibalize digital revenues. This thinking certainly supports the optimistic sales outlook, as it is estimated that only 10-15% of customers dine and order online.
The opportunity to gain greater momentum in international markets could also improve the prospects for the company. There are currently 24 locations in Canada, but there is potential for “a few hundred”. In addition, expansion into Europe (Chipotle has 11 stores in the UK today) could also drive unit growth.
Generating greater volume from each location is the bread and butter for any retail operation. The primary method of creating value is to increase sales per square foot. Therefore, hearing the CEO predict a higher target for this measure is a positive development for Chipotle shareholders.
But evaluation matters
Using the ambitious new target of $ 3.5 million in annual unit volume allows us to produce a business value estimate over the long term, which we can then use to decide if Chipotle stock is a good investment today. Even though the company has 6,000 locations (reiterated by Niccol as a long-term goal when calling for results) in 10 years, which equates to 320 openings per year, annual revenue in 2031 would total approximately $ 21 billion.
Chipotle’s net profit margin in the years leading up to the E. coli in 2015 was around 10%, but it has since fallen due to rising food and security costs. With greater volume and subsequent operating leverage, even if the net margin rises to 12% over time, annual profits within a decade will reach around $ 2.5 billion. Based on the current situation of the company market capitalization At $ 44 billion, Chipotle is trading today at 18 times its estimated net profit in 2031.
In 10 years, let’s say the stock carries a multiple of 38 on future earnings. That’s what Starbucks, at this point a mature food and beverage giant, is negotiating to this day. This would translate into a modest compound annual return of just 8% over the next decade. And remember, this is the best of times when Chipotle is opening more stores per year than he ever has and making a profit margin than he has ever had before.
Also, at this point it’s safe to assume that Chipotle will be a more mature company without the same level of growth prospects that it currently has, so the multiple could very well be less than the 38 I used in this. scenario. For comparison, the stock is currently trading at a massive futures price-to-earnings ratio of 64.
Of course, the company could continue to perform above expectations and Niccol could continue to increase that AUV target, but even so, there doesn’t appear to be any inherent safety margin in the stock price today. Given the company’s current valuation, it would be difficult to outperform the market over the next decade, even if you truly believed in the most optimistic assumptions.
For outside investors who want to join this quick and easygoing leader, it’s best to wait for a significant pullback before even thinking about buying stocks.
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Neil patel owns shares of Starbucks. The Motley Fool owns stock and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: $ 120 short calls in July 2021 on Starbucks. The Motley Fool has a disclosure policy.
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