What Chipotle Can Learn From Starbucks
August 16, 2013
With a market cap of $12.5 billion, and a P/E over 40,Chipotle Mexican Grill (NYSE: CMG ) has investors wondering if it can maintain the long-term growth rate necessary to justify its high valuation. And considering Chipotle shares already tanked once following a slowdown in sales growth, investors may fear a similar tumble.
With a market cap of that size, Chipotle is already one of the largest restaurant companies on the market. Larger peers McDonald's (NYSE: MCD ) and Yum! Brands(NYSE: YUM ) trade for the much more modest earnings valuations of 17 and 23, as the two older chains dwarf Chipotle in size. Compared to just 1,500 total Chipotle locations, there are about 35,000 McDonald's restaurants around the world, and over 39,000 restaurants under Yum's umbrella, which includes KFC, Pizza Hut, and Taco Bell. With such a large footprint already, a significant expansion is nearly impossible for McDonald's and Yum.
However, there's one larger restaurant chain that could serve as a model for Chipotle as it grows into its lofty valuation- -- Starbucks (NASDAQ: SBUX ) . The coffee empire has rebounded from a recession-era share price below $9, to over $70 today, or a gain of approximately 700%. It's now worth over $50 billion, but still carries a P/E ratio of 34, meaning the market expects its torrid growth to continue. In its latest quarterly report, Starbucks grew its earnings per share a whopping 28%, to $0.55, on a 13% increase inrevenue. That compares to just a 1% sales increase for Yum Brands and McDonald's in their latest reports.
Starbucks grew its comps 8% in the quarter, saw its operating margin jump 150 basis points to 16.4%, and opened 341 stores to bring its grand total to 19,209.
What's brewing inside
Despite Starbucks' numerous partnerships, co-branding initiatives, and steps to add new technologies like mobile payments, its growth is still driven primarily by simply adding new stores and growing sales within its current stores.
Despite Starbucks' numerous partnerships, co-branding initiatives, and steps to add new technologies like mobile payments, its growth is still driven primarily by simply adding new stores and growing sales within its current stores.
In its most recent quarter, Starbucks' strong organic growth was paced by increasing sales in the Americas and China Asia-Pacific regions, as Europe continues to pull out of a recession. The vast majority of sales come from its Americas region where revenues grew 12% in the quarter, and operating margin improved to 22.3%, but the Far East has proven to be a juggernaut. In the Asia/Pacific region, sales increased 29% and operating margin reached a stellar 36.2%. As we've seen with many other American brands across the Pacific, the Asian market is clearly hungry for Starbucks.
InnovationOn the earnings call, CEO Howard Schultz noted the company's "flywheel" strategy, which leverages digital, loyalty, and mobile capabilities, and uses Starbucks' brand partnerships to further drive profitability. The extensions Starbucks has made across the high-end beverage market in recent years are unparalleled. While some observers once saw Green Mountain Coffee Roasters' Keurig single-cup brewing system as a threat to Starbucks' more-expensive cup of Joe, the coffee chain, after initial resistance, partnered with Green Mountain and began producing its own K-cups. It just shipped its one-billionth branded K-cup in the last quarter. Similarly, the company has made a number of acquisitions, including Tazo, Teavana, and Evoultion Fresh, which give it further growth opportunities, and leverage its operational excellence. With its mastery of the coffee market, it only makes sense for Starbucks to set its sights on tea and fresh juice. Starbucks is also continually introducing new menu items such as its Clover-branded french press coffee, La Boulange baked goods, or the Valencia Orange Refresher
Finally, Starbucks' inroads into digital payments have been a savvy strategy to improve efficiency and increase brand loyalty. Dollars loaded on Starbucks cards grew 30% from a year ago, and dollars loaded via mobile and the web nearly doubled. The Starbucks card is now used in almost a third of all U.S. transactions, and more than 10% of its domestic sales are now done through its mobile app.
Lessons for Chipotle
In many ways, the burrito roller is already following in the footsteps of the coffee giant. Chipotle's recent decision to expand its Sofritas offering shows that management is not afraid to shake up its menu and stay ahead of the competition by offering a tofu-based meal that provides an option for vegetarians. As Chipotle matures, it will hopefully take similar steps to keep its menu fresh, and offer customers some variety. In the way that Starbucks has branched out with Teavana and Evolution Fresh, Chipotle has made a similar effort by opening its ShopHouse Southeast Asian Kitchen. While ShopHouse is just in its infancy, with its third and four locations set to open this month, it gives Chipotle another way to assert its dominance of the high-quality fast-casual segment, the way Starbucks has become synonymous with high-end coffee.
In many ways, the burrito roller is already following in the footsteps of the coffee giant. Chipotle's recent decision to expand its Sofritas offering shows that management is not afraid to shake up its menu and stay ahead of the competition by offering a tofu-based meal that provides an option for vegetarians. As Chipotle matures, it will hopefully take similar steps to keep its menu fresh, and offer customers some variety. In the way that Starbucks has branched out with Teavana and Evolution Fresh, Chipotle has made a similar effort by opening its ShopHouse Southeast Asian Kitchen. While ShopHouse is just in its infancy, with its third and four locations set to open this month, it gives Chipotle another way to assert its dominance of the high-quality fast-casual segment, the way Starbucks has become synonymous with high-end coffee.
Starbucks' success abroad also looks promising for Chipotle, which has just begun to open stores in Europe. Though the majority of its sales still come from the US, the coffee chain now operates in 60 countries, and has seen incredible in growth in Asia of late. The popularity of other fast food chains abroad such as McDonald's, KFC, and Subway also bodes well for Chipotle's international expansion plans.
Foolish bottom line
The coffee market, of course, has several key differences from the burrito market, and Chipotle cannot emulate Starbucks in every way. Coffee is a much stickier product than burritos, meaning Starbucks customers visit its stores more frequently, because coffee tends to be consumed daily, or even multiple times a day. Similarly, coffee lends itself more to consumer products, and co-branding and licensing opportunities, as the product is simply more flexible and adaptable by its nature.
The coffee market, of course, has several key differences from the burrito market, and Chipotle cannot emulate Starbucks in every way. Coffee is a much stickier product than burritos, meaning Starbucks customers visit its stores more frequently, because coffee tends to be consumed daily, or even multiple times a day. Similarly, coffee lends itself more to consumer products, and co-branding and licensing opportunities, as the product is simply more flexible and adaptable by its nature.
Above all, however, Starbucks serves as a model of how to create a stellar food-service brand with multiple growing revenue streams. Chipotle would be mindful to follow its lead as a symbol of high quality, which means continuing to raise its "Food with Integrity" standards as they are an important differentiator from its competitors. Chipotle will also need to keep innovating both in new products as well as other areas like payment options, and continue to take advantage of market opportunities as they arise.
As Starbucks has shown, establishing brand dominance enables enormous growth opportunities. Even after two decades of expansion, the company has no plans to slow down. It expects to open 1,400 new stores in its next fiscal year, and grow earnings 18% to22%. With only 1,500 stores currently, Chipotle looks minuscule by comparison. Its investors can only hope that, in 20 years, the burrito chain is boasting numbers like Starbucks' today.
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Yum! Brands, Inc. (YUM), Noodles & Co (NDLS): Is Chipotle Mexican Grill, Inc. (CMG) Destined for Greatness?
By in News
Published: August 19, 2013 at 10:48 am
Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Chipotle Mexican Grill, Inc. (NYSE:CMG) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Chipotle Mexican Grill, Inc. (NYSE:CMG)'s story, and we'll be grading the quality of that story in several ways:
1). Growth: Are profits, margins, and free cash flow all increasing?
2). Valuation: Is share price growing in line with earnings per share?
3). Opportunities: Is return on equity increasing while debt to equity declines?
4). Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at Chipotle Mexican Grill, Inc. (NYSE:CMG)'s key statistics:
CMG Total Return Price data by YCharts
| Passing Criteria | 3-Year* Change | Grade |
|---|---|---|
| Revenue growth > 30% | 78.2% | Pass |
| Improving profit margin | 11.3% | Pass |
| Free cash flow growth > Net income growth | 96.5% vs. 98.2% | Fail |
| Improving EPS | 101% | Pass |
| Stock growth (+ 15%) < EPS growth | 194.5% vs. 101% | Fail |
Source: YCharts. * Period begins at end of Q2 2010.
CMG Return on Equity data by YCharts
| Passing Criteria | 3-Year* Change | Grade |
|---|---|---|
| Improving return on equity | 9.2% | Pass |
| Declining debt to equity | No debt | Pass |
Source: YCharts. * Period begins at end of Q2 2010.
How we got here and where we're going
Chipotle Mexican Grill, Inc. (NYSE:CMG) comes through with flying colors, as it earned five out of seven passing grades. One of those failing grades only happened due to the narrowest underperformance -- free cash flow has grown right in with net income, and could easily surpass it by the time we look at Chipotle again. This is a strong performance, but can Chipotle keep up its progress without allowing its share price to run away from its fundamentals?? Let's dig a little deeper to find out.
Chipotle Mexican Grill, Inc. (NYSE:CMG) recently beat Wall Street's expectations on both top and bottom lines, which isn't surprising for those who've followed the stock for some time. Foolish intern JP Bennett points out CEO Steve Ellis' long-standing and very ambitious goal of changing people's perception about fast-food restaurants. Ellis has focused on creating high-quality fast-food outlets along with fostering a robust work culture. That's worked so well to date that other chains have begun to emulate the strategy.
According to the Pew Research Center, there are some 160,000 fast food restaurants across the U.S., serving about 50 million people, every day. My fellow Fool Sean Williams notes that people have been turning away from fast food due to increasing public awareness of their generally poor nutrition, which is pushed to the fore by healthy lifestyle campaigns (often funded by governments). Despite these underlying concerns, the American fast-food market has grown substantially, from $151 billion in 2003, to $200 billion in 2013. Since Chipotle rarely suffers the same negative health perceptions as its peers, the burrito maker could see outsized gains from the combination of these two trends.
Chipotle's immediate rivals Yum! Brands, Inc. (NYSE:YUM) and (to a lesser degree) Noodles & Co (NASDAQ:NDLS) are also expanding their product offerings and national footprints. Colorado-based Noodles & Co (NASDAQ:NDLS) has been growing at 16% per year, and it has a lofty plan to launch another 2,500 restaurants within the next two decades. On the other hand, Yum! Brands, Inc. (NYSE:YUM) appears to be moving into Chipotle's turf with a new concept called "KFC eleven," which bears certain stylistic and operational similarities to Chipotle. The new concept's Chipotle-like assembly line might pose a threat to other fast-food companies in the market, according to longtime Fool Rick Munarriz.
Putting the pieces together
Today, Chipotle has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
The article Is Chipotle Mexican Grill Destined for Greatness? originally appeared on Fool.com and is written by Alex Planes.
Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill.
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Chipotle Mexican Grill
Cours de l'action : CMG (NYSE)403,60 $US+1,66 (+0,41 %)
19 août 16:01 UTC−4 - Clause de non-responsabilité
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