Three Scenarios That Might Impact Chipotle Mexican Grill

Chipotle Mexican Grill (NYSE:CMG), the leader in the fast-casual segment, is one of the fastest growing restaurant brands in the U.S. The burrito maker has been able to attract customers and investors, with nearly 20% revenue growth every year for the last 5 years. Moreover, the company reported roughly 28% year-over-year (y-o-y) growth in net revenues and 16.8% growth in their comparable store sales in 2014, primarily driven by two key factors: an increase in the average check and an increase in customer visits. ^[1] Chipotle’s business model is positioned somewhere between fast food restaurants and casual dining restaurants, providing counter service with customized, fresh, organic, and high quality food at slightly higher prices than the fast food chains. The new innovative concept attracted more traffic and as a result, the Mexican cuisine specialist was able to steal customer traffic from the top traditional fast food chains.

We have a $673 price estimate for Chipotle, which is roughly the same as the current market price.

See Our Complete Analysis For Chipotle Mexican Grill

CMG’s stock rose more than 25% from $531 to $667 in 2014, primarily due to strong financial results. Trefis’ estimate for the CMG stock price is $673, which is currently in-line with the market price. However, Trefis estimates the net revenues for the fiscal 2015 to be more than $5 billion, which is 6% above the general consensus. ^[2] Taking the current market and industry trends, as well as probable future scenarios in mind, there are 3 catalytic factors that can impact the company’s stock price.

• Shift In Dining Habits In The U.S.

Top quick service restaurants, such as McDonald’s (NYSE:MCD), Wendy’s, Yum! Brands, and Burger King (now Restaurant Brands International Inc), dominated the last decade in terms of customer traffic with its innovative new burgers, sandwiches, and other value meals. Moreover, the breakfast menu introduced by some of these chains attracted the morning working class group, adding to the customer count. These fast food chains provide low cost food and high speed service. There is no doubt that Americans love fast food, but the industry is facing its own challenges, ranging from rising food costs and increasing health concerns.

Over the past few years, the U.S. restaurant industry has been witnessing a gradual trend shift in the customers’ food preferences. There have been increased concerns over the quality of food served in these quick service restaurants. Being labeled as junk food, these food items contain high quantity of fat, sugar, and oily additives that are believed to cause many health problems, including diabetes, obesity, and other heart and digestion problems.

Consequently, a new concept of organic fast food service was introduced by the fast casual segment for people who not only need quick meal options, but also healthier alternatives. Chipotle Mexican Grill was one such food chain that was able to cater to the needs of the people. The company promises high quality and freshly prepared food to its customers with its ‘Food with Integrity’ campaign, that too gives reasonable prices and quick service. The Mexican cuisine concept took the industry by storm, as it delivered strong top-line growth at a time when the other  well-established brands were struggling.

According to the NPD’s foodservice market research, the customer traffic growth in QSRs was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. ^[3] Despite the flat overall customer traffic, Chipotle’s average annual number of visits per restaurant rose by 1.2% to 186,000. Trefis estimates the number to increase by 6% to 198,000 in 2015, and expects it to rise to 243,000 by the end of 2o21.

If quick service restaurants, such as McDonald’s and Burger King, came up with organic alternatives at cheaper prices to attract customers in the next 2-3 years, we might see only a 4% increase in the average visits per restaurant to 194,000 in 2015, and there will be 3% downside ($652) to our price estimate.

• Food Prices

Chipotle mostly requires meat products, such as pork, chicken, and beef, to prepare its food items. Last year, the company witnessed an increase in prices of all the meat products, due to several reasons. According to the USDA, retail prices of Ground beef rose nearly 22% and that of pork and hams rose 15% in 2014. Apart from this, prices of dairy products rose slightly during the last year. ^[4] As a result, the food and beverage expenses were 34.6% of the revenues, highest in the last 5 years. To counter this, the company was forced to raise the prices of its steak burritos by 4%-6%, or 32-48 cents, whereas the overall menu prices went up by 6.5% on average. This offset the increase in expenses and resulted in an increase in average check for the company. According to Trefis estimates, average spend per visit rose 12.4% to $13.05 in 2014.

According to the United Stated Department of Agriculture (USDA), meat prices will likely rise further in 2015, due to the Texas/Oklahoma drought and Porcine Epidemic Diarrhea virus (PEDv). Moreover, further disturbances in weather situations in those regions might drive up food prices. ^[5] Trefis estimates the average check to rise 6% in 2015 to $13.83, and to reach above $16 by the end of our forecast period. On the other hand, food expenses are estimated to increase to 35.8% of the revenues in 2015.

If meat prices rise more than the expectation, and food expenses reach 36.6% of the revenues in 2015, with nominal increase in the menu prices, we might see a 3.4% downside ($649) to our price estimates. However, if the menu prices are increased subsequently, so that the average check reaches $14.10 in 2015, the downside might reduce to 1.4% ($662).

• Store Expansions

In 2014, Chipotle added 192 net new stores taking the total count to 1,783, including 1,755 Chipotle restaurants in the U.S. and 7 of them in Canada. The number of stores is still less than compared to that of McDonald’s and Burger King. Most of the Chipotle stores are located in California and New York, with a lot of scope for expansion in the less targeted areas. Moreover, outside the U.S., there are only 17 stores in Canada, France, U.K., and Germany. Chipotle can target international expansion, with high GDP countries in focus. Currently, the company plans to open 190 restaurants in 2015.

Trefis estimates the company to open 190 stores in 2015 and to have a total of close to 3,100 stores by the end of our forecast period.

If Chipotle aggressively expands in the next two to three years both domestically and internationally, with an average of 220 restaurants openings per year, we might see an increase in average visit per restaurant as well. This scenario will provide an 8% upside ($723) expansion to our price estimate.

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More Trefis Research

1. Chipotle Mexican Grill Q4 2014 earnings call transcript [↩]
2. Reuters: Chipotle Mexican Grill [↩]
3. Income gap and shrinking middle class take a toll on restaurant industry [↩]
4. USDA meat price spreads [↩]
5. Food Price outlook 2014-15 [↩]