Chipotle's Expansion Plans Could Be Swallowed Up By Rising Food Costs


While Chipotle's (CMG) fresh, nutritious Mexican fare has many fans in the U.S., the company has also been consistently adding new restaurants and is looking at further expanding in Europe. It reported impressive first quarter numbers driven by a 12.4% increase in comparable restaurant sales, and opened 12 new restaurants bringing its total store count to 1,095. However, increasing food and commodity costs could affect Chipotle margins and discourage the food chain from opening new restaurants until the costs pressures settle down -- a situation affecting other restaurant chains like McDonald's (MCD), Burger King, Yum Brands! (YUM) and Papa John's (PZZA) as well.

While we estimate the total number of Chipotle restaurants will increase to 1,800 by the end of our forecast period, Trefis members expect the restaurant count to reach 2,100 – implying an upside of above 15% to our price estimate for CMG stock.

Our price estimate of $273 for Chipotle's stock is roughly in line with the market price.

Distinguishing Menu Attracts More Customers

Chipotle's Mexican menu is a welcome change for fast food consumers accustomed to the usual burgers and pizzas. Despite being slightly pricier compared to McDonald's, Chipotle's fresh and nutritious tacos and burritos attract many customers and are popular among certain segments like university students.

The firm's revenue for the first quarter increased by 24% year-over-year to $509 million, driven by higher comparable store sales resulting from increased store traffic. (See Comparable Store Sales Surge Drives Chipotle's Q1.) The number of Chipotle restaurants is still on the lower side at around 1,095 compared to McDonald's, which has 11,000 franchises and close to 2,000 company operated restaurants in the U.S. This implies tremendous scope for Chipotle to expand.

... But Cost Pressures Could Take a Toll

The average spend per customer at a Chipotle restaurant is around $11, compared to less than $4 for McDonald's. This clearly indicates that Chipotle's Mexican fare is way more expensive than burgers and sandwiches served at McDonald's. On top of this, rising inflation is eating into the margins of food companies, and Chipotle is no exception. It reported restaurant level operating margin of 25.2% during the last quarter, a decrease of 90 basis points over the prior year period.

Increasing food prices could result in lower visitor count or decrease in average spend per customer visit, and this could eventually dampen the company's plan of opening 135-145 new restaurants by the end of 2011.

Our complete analysis for Chipotle's stock is here.

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