Analyst Viewpoint: Chipotle doesn’t follow conventional ‘fast food joint’ path to success
Oct 25, 2011 – Pacific Management Consulting Group By JOHN GORDON
Headlines are rewritten for editorial clarity. The original story and headline begin below.
Original Headline: Chipotle: Not Just A Fast Food Joint
SAN DIEGO, CALIFORNIA, October 24, 2011 (Pacific Management Consulting Group) – Many interesting notes are apparent from Chipotle’s (CMG) last two quarters earnings trend.
It’s amazing where they are: Two back-to-back quarters of plus-10% same-store sales gains in a weak economy. CMG is the highest earnings dollar per share generator in the entire restaurant space (Piper Jaffray 2011E, $6.85 EPS), now way ahead of No. 2 profit/share generator McDonald’s (MCD), its holding company parent until 2006. This despite: (1) no franchising (2) no expensive direct product TV support (3) no massive discounting or coupon programs, and (4) menu stability, no new menu products in 17 years (but many tweaks).
Even better, per its Q3 2011 earnings call last week, its “early peek” Q4 2011 same-store sale trend looks great, at approximately plus 10%.
As one would hope, units open and then build sales (at $1.4M AUV, to $1.975M, the system average). Reported good financial leverage from their type A sites is highly significant. The Type A is the so called “less than main at main locations” site strategy announced in 2010. Sales have been at par with the system and generate improved cash on cash returns as the store development CAPEX is less than traditional sites.
The number we are particularly watching is the number of new units, 155-165 in 2012, and international results. The oft-noted Chipotle “restaurateur” management plan is all about having good people in the company to handle the growth. The restaurateur program, while not unique to this industry nor perfect, is what good restaurants should do.
The new Shophouse concept is an interesting creative restaurant development but not worth much attention right now. The 100 basis points decline in restaurant operating margin to 26.3%, due to cost of goods sold and commodity inflationary issues (but still a restaurant space leader), is important but for now the runway for top line sales growth exists. Chipotle has a finite U.S. unit penetration, but the success of the Type A site suggest we don’t know where that point is yet.
Unlike Cramer Friday, we never thought Chipotle was a “fast food joint”, nor should the same standards apply. The bar should be higher.
John Gordon is principal and founder of Pacific Management Consulting Group (http://www.pacificmanagementconsultinggroup.com/), an association of service sector senior management experts providing research and niche earnings analysis, management consulting and advisory expertise in the restaurant sector.
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