Should you satisfy your Chipotle craving after its 50-for-1 stock split?
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Chipotle Mexican Grill (CMG:NYSE) has come up with its first ever stock split, a big 50-for-1 split, and its stock will be trading on a split-adjusted basis on June 26. The company is granting Chipotle shareholders 49 additional shares for each share they own. With the stock closing at a lofty $3,214 on June 20, the rationale is that the split will bring down CMG’s share price and make the shares more affordable to those looking to get a taste of Chipotle. The company also plans to award equity grants to employees who have put in more than 20 years of service with Chipotle.
Maybe you have been craving Chipotle stock for a while. According to Chipotle’s marketing pitch, “We strive to cultivate a better world by serving responsibly sourced, classically cooked, real food with wholesome ingredients and without artificial colors, flavors or preservatives.”
Should you satisfy your craving now that the stock price will be more affordable? Certainly, the stock has handsomely rewarded its shareholders so far, considering it debuted at around $50 in early 2006, making for about a 6000 % return.
Scope for growth
According to Jack Hartung, Chipotle’s chief financial officer, "This split comes at a time when our stock is experiencing an all-time high driven by record revenues, profits, and growth." For the first quarter (ended March 31, 2024) of the company’s 2024 fiscal year, the quick service restaurant’s total revenue rose more than 14% to $2.7 billion from the 2023 comparable period, with earnings per share up about 24% to $13.01.
Comparable restaurant sales (representing change in total revenue from the 2023 first quarter for restaurants in operation for at least 13 full calendar months) were up 7% for the period. This comes about as a result of higher number of transactions as well as a rise in the average check amount. For its 2023 fiscal year ended December 31, 2023, the last full year Chipotle has reported on, the company’s total revenue rose 14.3% from 2022 to $9.9 billion, with earnings per share gaining a lofty 38.4% to $44.34.
On its first quarter earnings call, Chipotle attributed its good results to its efficiency in serving customers, as well as a marketing push highlighting its “barbacoa” offering and bringing back its “chicken al pastore” offering on a limited time basis.
Chipotle (which got its start with a Denver, Colo., restaurant in 1993) also opened 47 new restaurants in the first quarter, including 43 Chipotlanes (its drive through outlets) and indicated that it expects to open up to 315 restaurants (more than 80% of those with Chipotlanes) this year. The company also made its first foray into Kuwait, and expects to grow more in that region.
At the end of 2023, the company operated 3,371 Chipotle outlets in the U.S. and 66 internationally (including in Canada and Europe). It leases the majority of its restaurant space, as well as its California office headquarters. Management expects that there’s scope for further expansion to as many as 7,000 restaurants, and also to improve restaurant efficiencies.
Social media backlash, and other risks
There does seem to be good potential for Chipotle to grow further, especially internationally. However, the company also faces risks. For one, digital sales through third party delivery companies (such as Uber eats) made up 18% of CMG’s 2023 food and beverage sales. When customers order through delivery apps, Chipotle may realize a lower profit. Moreover, consolidation in the delivery business may give delivery services more negotiation power, which could negatively impact Chipotle’s profitability.
Further, New York City and Seattle, as well as the state of California, have implemented minimum wage laws for delivery drivers. Other states are also considering such laws, which could again cut into Chipotle’s profitability.
Also, in April California raised its minimum wage for fast food restaurant workers to $20 an hour. Chipotle reports that its California wages went up almost 20% as a result and it raised its menu prices in all its California locations by 6% to 7% to cover the increased cost. However, the company continues to benefit from higher sales volume which helps better offset its fixed expenses, such as labor. And Hartung expects that California customers will continue to patronize Chipotle considering the value it offers.
Another risk to the company is the ease with which consumers have the ability to broadcast on social media. They could turn to avenues such as X, Instagram, YouTube, TikTok and Facebook to spread rumors and share negative experiences about any company, influencing its sales and goodwill. This happened to Chipotle earlier this year, as customers engaged in social media activity to protest what they see as a downsizing of Chipotle portions. Chipotle felt the backlash enough to come out with a statement denying this.
Also, Chipotle has been known to try out other restaurant ideas, such as Farmesa and Tasty Made, which have not gone well. And the company has been implicated in food safety issues that have impacted customers, which create financial and reputational risks.
Feeling impact of inflation
For the first quarter of 2024, Chipotle saw its operating costs go down to 72.5% of its revenue (from 74.4% for the 2023 first quarter), but still felt the impact of inflation from food costs. Its operating profit margin was at 16.3% for the period, up from 15.5% for the 2023 first quarter. The company’s current ratio (indicating the level of current assets available to cover its current liabilities) was at a healthy 1.65, while its debt-to-equity ratio was at a reasonable 1.23.
The company’s earnings per share of about $47 for the last 12 months makes for a high price-to-earnings ratio of about 70, compared to about 30 for the hotels, restaurants and leisure sector. And Chipotle’s book value per share is about $122, which means the stock is selling at about 26 times its book value.
Should you satisfy your craving?
Chipotle operates in an industry that’s impacted by the vagaries of consumer behavior, and eating out is a discretionary activity that consumers could cut down on whenever the economy hits a recession. Even then, the company is looking to grow, and drive up productivity with the use of technology. Chipotle doesn’t pay a dividend and deploys its earnings back into the business, a sign of its optimism about growth prospects.
Although it operates in a competitive landscape, Chipotle believes that its use of premium ingredients, affordable prices and attractive margins give it a big competitive advantage. The company’s plan to reward long-time employees with stock options could also help it hold on to them.
The reduced stock price after the split will make Chipotle more affordable, though the additional shares outstanding will also dilute future earnings. The company has a stock buyback plan which could provide some support for the stock price. Given the long-term growth prospects, particularly internationally, the stock split could present an opportunity to satisfy your Chipotle stock craving and hold on for the long-term. However, the stock’s lofty price-to-earnings ratio is certainly a concern.
P.S.Want me to look into a particular stock? Reach out to stocktakes1@gmail.com and I’ll consider your suggestion.
Note: I do not own any individual Chipotle stock and I do not intend to take a position in the stock within five days of publication of this article. This write up is my unbiased opinion and not intended as financial advice. All investments carry risks and you should talk to a financial advisor to learn about the suitability of an investment for your portfolio. I did not receive any compensation for this piece that influenced my views.