How Did Chipotle Stock Gain 20% This Year Despite Inflationary Headwinds?

After a 20% increase since the beginning of this year, at the current price of around $56 per share, we believe Chipotle Mexican Grill stock (NYSE: CMG), a fast-casual restaurant chain that focuses on fresh and organic ingredients in burritos, salads, and more – could see modest growth. CMG stock has increased from around $46 to $56 year-to-date, outperforming the broader indices, with the S&P growing about 17% over the same period. In comparison, CMG’s peer McDonald’s (NYSE: MCD) stock is down 2% since the beginning of this year.

CMG’s stock growth can be attributed to restaurant-level operating margin expansion, menu innovation, price increases, and good execution of the company’s digital strategies. Of course, the 50-to-1 stock-split announcement has also helped the stock to gain some momentum. Chipotle’s revenue growth is slowing, but its profitability is holding up well – as the company has been able to successfully pass on higher costs to customers by raising menu prices.

CMG stock has seen extremely strong gains of 85% from levels of $30 in early January 2021 to around $56 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in CMG stock has been far from consistent. Returns for the stock were 26% in 2021, -21% in 2022, and 65% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that CMG underperformed the S&P in 2021 and 2022.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including H, WMG, and AMZN, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CMG face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

We forecast Chipotle’s Revenues to be $11.4 billion for the fiscal year 2024, up 15% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $1.10. Given the changes to our revenues and EPS forecast, we have revised our estimate for Chipotle’s Valuation to $59 per share, based on a $1.10 expected EPS and a 54.0x P/E multiple for the fiscal year 2024 – about 5% higher than the current market price. Below we talk about why we think Chipotle’s business is still worthy of such a high price multiple (>50x).

In the fiercely competitive restaurant industry, how does Chipotle stand out?

• To begin with, Chipotle has remarkable store economics. Its average restaurant sales rose 7% year-over-year (y-o-y) to $3.1 million in Q2, despite adding 53 new restaurants over the same period – illustrating that the additions are not cannibalizing existing locations. It continues to post healthy sales and profitability growth in the first half of 2024, which is a big step in the right direction for the popular Tex-Mex chain. During the first half, Chipotle’s revenue grew 16% y-o-y to $5.7 billion. CMG ‘s comp-store sales rose 7% in Q1 and 11% in Q2 – suggesting that it is maintaining growth in a sluggish economy. In addition, the company’s earnings per share rose 28% y-o-y to 59 cents in the fiscal first half.
• Digital sales continue to be strong at 35% of the core food and beverage business in Q2, despite the return of in-person dining. Chipotle’s highest-margin sales are digital orders, so momentum on this front serves the business well for continued profit growth in the long run.
• Chipotle’s restaurant-level operating margin grew 140 basis points to 28.9% in Q2, driven by the benefit of sales leverage, partially offset by wage and ingredient inflation. The menu price increases from October 2023, partially offset by inflation across several ingredient costs – primarily avocados, beef, and produce – and a protein mix headwind from the successful Braised Beef Barbacoa marketing initiative.
• Chipotle’s rewards program (launched in Q1 2019) is gaining steam with an outstanding 40 million members (as of Q2 2024), wherein each purchase wins points that can be redeemed for food. In comparison, Starbucks (NASDAQ: SBUX), which introduced its world-class rewards program more than a decade in advance of Chipotle, has 34 million members in the U.S. in FQ3 2024 ending July.
• The company’s drive-thru option Chipotlane helps new restaurants generate higher sales with better margins. As such, out of the 53 new stores that opened in Q2, 46 were built with a Chipotlane.
• Lastly, an additional benefit is that Chipotle has succeeded in areas with populations below 40,000 people. That gives the company the ability to meet its expectation that it can grow to 7,000 locations in North America alone (from ~3,500 locations at present). The story of its European growth has only just begun. There are only 27 locations across the UK, France, and Germany so far. While McDonald’s operates over 40,000 restaurants worldwide – demonstrating how far international success can take a company.
• For full-year 2024, Chipotle is forecasting mid-to-high single-digit growth in comparable restaurant sales assuming current sales trends continue. In 2024, it counts on opening 285 to 315 new restaurants with over 80% having Chipotlane (drive-thru). 

Chipotle recently lost its CEO, Brian Niccol (who joined in 2018) to Starbucks. Chipotle is making its COO Scott Boatwright the interim CEO. Boatwright has been at the company longer than Niccol, and we expect things to continue running smoothly during this transition period. In any case, Chipotle’s business is already firing on all cylinders at the moment.

It is helpful to see how its peers stack up. Check out how Chipotle’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 8/30/2024
[2] Cumulative total returns since the end of 2016