Chipotle Mexican Grill (NYSE: CMG) Investors have been tense since the announcement of CEO Brian Niccol’s departure in August. The stock fell after the June split, and is tentatively making its way back up as investors become comfortable with the idea that the chain can continue even without Niccol leading the way.
If the market was even more critical of that idea, the company just made it clear that it won’t abandon its strong leadership position in the fast-casual restaurant world, which is a clear buy signal for investors.
The unstoppable burrito king
Chipotle has become the go-to place for reasonably priced fast-casual fare. It promotes itself as fresh, healthy food and innovates with its menu to stay on top of trends.
It attracts a wealthy customer base that is more resilient despite inflation, and has done well under the most adverse conditions. It’s one of the few restaurant chains that haven’t missed a beat during the pandemic, without even a quarter of sales declines or losses.
In the second quarter of 2024, revenue increased 18.2% year over year, driven by an 11.1% increase in comparable restaurant revenue. Operating margin increased from 17.2% to 19.7%, and earnings per share (EPS) increased from $0.25 last year to $0.33 this year. That may have been somewhat inflated by the stock split hype, but it wasn’t an unusual quarter for the company.
New stores continue to open rapidly, with 52 in the quarter and around 285 expected for the full year. The company plans to reach about 7,000 stores in North America, up from about 3,500 today, which will give it plenty of years of growth from new stores alone, but it’s also starting to look at international markets.
What Chipotle is planning
Chipotle wasn’t always this successful. The company faced major consequences after E-coli was discovered in its restaurants and Niccol was called in to turn things around.
The question among investors is whether or not the country can sustain its success without its leader. Niccol is a star in developing work processes and creating team leaders from management. He also knows how to cultivate and market a brand.
Now that he’s introduced this culture to the company at all levels, there’s a good chance the new management, led by interim CEO and former chief operating officer Scott Boatwright, will keep things moving. So far, Chipotle hasn’t brought in any outsiders; it lets the insiders steer the ship, and that certainly seems like the right move. No new brand is needed.
Last week, the company made some announcements that should inspire confidence among the new management. It launched a fund called Cultivate Next in 2022 to invest in companies that align with its vision to create a better world and help achieve its goal of 7,000 stores. Through this fund it is now investing in two new concepts.
The first is an Australia-based supply chain platform called Lumachain that uses artificial intelligence (AI) to track products as they move through the supply chain from farm to store in real time.
The second is a fast-casual dining concept called Brassica, which focuses on Eastern Mediterranean dishes. It’s like a Chipotle with a different twist, reminiscent of Cava. It currently only has six stores, but with Chipotle’s resources and following its proven model, that could seriously expand.
Does this point to new directions for Chipotle? Not at the moment, but it could certainly pull some tricks up its sleeve. If all goes well, the chain will have the resources and capabilities to develop many different concepts that can increase its potential and achieve an even longer growth trajectory.
Cultivate Next has already invested in several other programs, and this could be a breeding ground for serious growth initiatives in technology, AI and restaurant concepts. Chipotle shares jumped on the news.
You won’t get a deal on this stock
Chipotle’s price-to-earnings ratio (P/E) has been high for a long time, and you may have already missed the chance to buy it cheap. Even that is relative: the price/earnings ratio had not fallen below 48 even at the recent low. However, now it is 58 again.
That speaks to investor confidence in Chipotle stock. Niccol or not, Chipotle has an excellent, reliable growth model that has delivered incredible returns for investors in the past. The new management shows its strength and willingness to be bold in signature Chipotle fashion, and the company is well positioned to continue creating shareholder value well into the future.
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Jennifer Saibil has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: Short December 2024 Put $54 on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
1 Reason Why Chipotle Mexican Grill Stock Is Now Showing a Huge Buy Signal was originally published by The Motley Fool
