Many growth investors are well aware of Chipotle Mexican Grill (NYSE: CMG). The company’s plan for new restaurants seems to get a lot of press, while same-store sales are the wild card, which either help, or hurt the stock in the short-term. With Panera Bread (NASDAQ: PNRA) rolling the Panera 2.0 concept out to more locations, this competitor could become a bigger challenge. At the same time, Yum Brands (NYSE: YUM) is reporting impressive growth at the Taco Bell chain. The good news is there are three ways Chipotle can continue to grow within its existing locations.
Low No More?
It seems like for the last few years, Chipotle has been offering same-store sales guidance of, “low single-digit growth.” In the past, price increases have helped prop up same-store sales, yet this year appeared to be different. As menu price increases from last year expired, the company’s same-store sales increased by 4.3% annually in the most recent quarter.
On the surface, this result would seem to put Chipotle right in the middle of its two peers. Panera’s company-owned same-store sales increased by just over 2%. During this same timeframe, YUM Brands’ Taco Bell chain increased comps by 6%. However, Chipotle’s same-store sales are likely to come in ahead of the company’s guidance for one reason…lack of pork.
Problems with sufficient pork supply, has been an ongoing issue for Chipotle, as carnitas had to be removed from the menu. The company originally tried to roll its limited carnitas’ supply to different parts of the country. That strategy created confusion, and management changed its focus, to keeping its restaurants that used more carnitas in stock.
Now that Chipotle has solved the supply issue, the company believes carnitas will return to all restaurants by the end of the year. Most investors know about these plans, however what they may have missed is, the connection between carnitas and the company’s same-store sales.
This brings us to the first reason to believe Chipotle can grow sales within its existing locations. Management specifically said that, the lack of pork supply appeared to hurt comps by 2%. In addition, CFO John Hartung said that the company’s guidance for “low single-digit comps” does not include any benefit from bringing carnitas back.
It seems possible that the re-inclusion of this popular ingredient could boost comps past the “low” range solidly into the “mid” range. As we’ve seen in the past, any positive benefit to same-store sales usually boosts the stock. It appears this pattern is set to play out again.
One Price Increase Deserves Another
The second reason to believe Chipotle can increase sales within its existing locations is the company plans a price increase on beef and barbacoa when carnitas come back. Management has intentionally held off on a price increase on these two ingredients, as they are the most natural substitutions for carnitas.
This has been the right choice, as the company didn’t want to tell the customer their favorite meat was unavailable, and then hit them with a higher price for their substitution. What is fascinating is the company’s CFO said that rolling out carnitas equates to a “price increase in the ballpark of 4%.” This item is a higher margin sale than beef or barbacoa. As carnitas come back, Chipotle can take a price increase on beef and barbacoa, in the 40% of its restaurants that haven’t had this opportunity.
The end result should be higher margin sales nearly across the board. Between higher margin carnitas’ sales, and higher prices on beef and barbacoa, the only meat option that isn’t going up in price is chicken. Chipotle’s CFO said the increase in beef and barbacoa should equate to a 1% to 1.1% price increase. If we add this to the equivalent 4% price increase from the sale of carnitas again, the company gets the benefit of a combined 5% boost to pricing.
At Chipotle’s competition, Taco Bell sales increased by 9% annually last quarter. Panera Bread reported a 7% increase. Investors should be excited that Chipotle increased sales by 14%, and this occurred without the benefit of a correctly priced menu.
Believe It or Not
The third reason to believe Chipotle can increase its sales inside its existing stores has to do with the large percentage of people who don’t know what Chipotle is. The company said, “35% to 40% of people have never been to Chipotle,” and further, “55% of our customers only come a couple of times a year.”
This is a common opportunity / problem facing Chipotle and Panera Bread. Each company has fewer than 2,000 restaurants, and there are large sections of the population that don’t visit regularly. The difference is, while Panera 2.0 is designed to help with throughput, this concept is will only hit 300 locations by the end of 2015. Chipotle has the throughput capabilities – it just needs to drive new customer traffic.
This isn’t the case with YUM Brands’ Taco Bell chain. Customers who haven’t heard of Taco Bell are few and far between. The company must instead convince customers to come in more often, as opposed to gaining new customers.
Chipotle’s existing base of restaurants covers a large section of the country. Its stores are generally busy, which drives word of mouth advertising. This grass roots marketing, should continue to drive new diners into the store.
With carnitas back on the menu, some less frequent diners should begin to visit Chipotle more regularly. As beef and barbacoa prices rise, the company will benefit from better pricing. With a large percentage of people having never tried Chipotle, the company can grow sales by getting more customers in existing stores. The fact that the company is aggressively building new locations is a huge bonus to the story. Long-term investors should consider filling their portfolio with the stock, as more and more diners fill up on the food.
Get $50 to replicate the world’s best investments on Instavest now. Code: CHIPOTLE