Why Have We Increased Our Price Estimate For Chipotle By 24%?
Chipotle Mexican Grill‘s (NYSE: CMG) new CEO, Brian Niccol, has had an upbeat start to his tenure as the company posted revenues that were largely in-line with consensus estimates, as well as an earnings beat. Price hikes to the tune of about 5%, comparable sales growth of 2.2%, and a 20% improvement in digital sales helped CMG deliver a revenue increase of 7.4%. These price increases also helped to lower the food costs as a percent of sales, which together with reduced promotional and marketing expenditure aided in improving the margins. The company expects the comps to grow at low-single digits for the full year, as well as restaurant level margins to improve to, or even exceed, the 17.5% to 18.5% range.
Subsequent to the posting of strong first quarter results and full year guidance, we have updated our price estimate for Chipotle Mexican Grill to $386, indicating a rise of 24%, although our new price is still lower than the current market price by 15%. The charts have been made using our new, interactive platform. The various driver assumptions can be modified by clicking here for our interactive dashboard, to gauge their impact on the earnings and price per share metric.
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Factors Influencing The Price Change
1. CEO Change: Brian Niccol joined CMG as its new Chief Executive Officer (CEO), effective from March 5, 2018. Niccol comes from Yum! Brands where he was the CEO of Taco Bell. He was instrumental in implementing a successful turnaround of that business. Niccol comes with strong expertise in digital technologies, restaurant operations, and brand building, and these skills are crucial for Chipotle’s turnaround. During the first quarter earnings call, Niccol mentioned the possibility of expanding to breakfast items, and incorporating drive-thrus, besides increasing the focus on the digital platform.
2. Accelerating Digital Sales: This is the fastest growing part of CMG’s business, with a growth of 20% reported in the quarter, and which now represents 8.8% of the total sales of the company. This digital sales growth has been led by mobile ordering, which was up 41% over the previous year. In 2018, CMG intends to accelerate the rollout of its digitally-enabled second make-lines. These new lines enable a faster, and a more accurate experience for the digital customers, and allows CMG’s staff to more easily support the higher sales volumes. Cumulatively, including new restaurants, the company expects to have at least 30% of its restaurants outfitted with these new second make-lines by the end of 2018.
3. Adding Catering and Delivery: Catering forms roughly 1% of the total sales, and is a largely untapped opportunity for the company. CMG recently expanded its catering delivery availability to 1,500 restaurants from 940, and on average, has noted a 15% lift in catering sales when delivery is added. Meanwhile, the company’s delivery sales continue to grow at a fast pace, and CMG intends to expand the number of delivery partners it works with.
4. New Restaurant Openings: CMG opened 35 new restaurants in the quarter and continues to expect 130 to 150 new openings for the full year. Moreover, the company has plans for a similar number of openings for 2019 as well. New restaurant openings can have a significant positive impact on the company’s revenues. Meanwhile, the company is also in the process of reviewing roughly 100 underperforming restaurants.
As a result of the above factors, we expect a revenue growth of 8.3%, instead of 8% earlier. The net income margin is expected to improve moderately, based on higher revenues, as well as lower food costs as a percent of revenue, as per the guidance provided by the company. We have significantly increased our P/E multiple, from 36.6 to 44.8. This increase is solely based on the expected performance of the company in the future. As per our estimates, there is a high possibility of CMG’s earnings touching $20 per share post-2021, based on the aggressive expansion plans and increasing comps. Despite a challenging environment, the company has also been able to reign in its food and labor costs, resulting in a higher net income margin. These factors should bode well for the company in the future.
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