Revenue growth is essential for every business, and industry leaders can achieve high growth even in a slow economy if they focus on trends. Chipotle Mexican Grill, Inc. (NYSE:CMG) is a chain of restaurants specializing in burritos and tacos and has built a solid reputation for serving high-quality organic ingredients in its products. The company shows a significant hike in its top and bottom lines and has rewarded its investors well in the past few years. Chipotle is popular due to its large burritos, assembly line production and use of natural ingredients.
Strong earnings
Chipotle Mexican Grill, Inc. (NYSE:CMG) posted strong first quarter earnings with revenue of $726.8 million, an increase of 13.4% year-over-year. The company’s net income rose 22.2% to $76.6 million, in comparison to $62.7 million in the first quarter of 2012. The growth of its top line is driven by new restaurant openings; the company opened 48 new restaurants during the first quarter, increasing its total branches to 1,458.
Comparable restaurant sales increased only 1%, as compared to 12.7% in the first quarter of 2012. The company ended its first quarter with a strong cash and cash equivalent of $346.9 million, versus $322.5 million in the prior quarter.
Rising food costs
Chipotles’ peers
McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM) are the main competitors of Chiptole. Yum! operates a total of 38,000 restaurants globally under the brand names of Taco Bell, KFC and Pizza Hut. The company generates more than half of its revenue from the Chinese market and is now also facing a decline in sales. Yum! reported a 19% drop in sales during May, which was a smaller decline than the 29% drop it experienced in the month of April due to an outbreak of bird flu in China.
McDonald’s Corporation (NYSE:MCD) is the world’s largest hamburger fast food restaurant chain. With more than 34,000 restaurants, the company operates in more than 118 countries serving 69 million customers every day. McDonald’s was actually a prime investor in Chipotle Mexican Grill, Inc. (NYSE:CMG) in 1998, investing $360 million into the chain to fuel its early growth. Over time it has separated its business from Chipotle, however. McDonald’s received around $1.5 billion from Chipotle’s IPO in 2006.
Chipotle discloses all GM items
Chipotle Mexican Grill, Inc. (NYSE:CMG) announced that it will label its menu that contained genetically modified organisms (GMOs) on its website. By this announcement, Chipotle Mexican became the first fast food chain that voluntarily labeled menu items that contain GMOs. The company stated on their website that they aim to eliminate GMOs from their ingredients. Chipotle is working to shift from soybean oil that’s made from GM soybean crops to non-GMO sunflower oil. The company stated on their website that out of 24 ingredients half of their ingredients are driven by GM soybeans.
Growth driver
Chipotle Mexican Grill, Inc. (NYSE:CMG) has announced that it intends to expand its ShopHouse Southeast Asian Kitchen brand which was first opened in Washington, D.C in 2011 and spend more than a year tweaking the menu and concept. ShopHouse currently serves its customers with curries, wok-seared vegetables, pickles and Thai staples like steak laab and chicken satay. Due to popular demand, the company is expanding its network further in Washington D.C. and in California. The company plans to open a total of eight units on both coasts by mid-2014.
Valuations
Chipotle Mexican Grill, Inc. (NYSE:CMG) forward price-to-earnings ratio is 30.2, in comparison to McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM) which have ratios of 16.1 and 18.9 respectively. The dividend yields for McDonalds and Yum! are 3.10% and 1.90% respectively, while Chipotle does not pay a dividend and is not expected to pay one in the near future. The reason for this is that Chipotle is still in a growth phase while McDonald’s and Yum! have matured. Chiptole believes that the effective way to create shareholder value is by first investing into its business rather than by paying dividends.
Conclusion
Chipotle Mexican Grill, Inc. (NYSE:CMG)’s earnings and revenue have shown a significant growth over the years. The decrease of the company’s comparable restaurant sales is a point to fear, but strong earnings can be generated from additional ShopHouse locations. The management plan to raise its menu prices may have an impact on its sales, but its strong reputation and growing restaurant chains will allow it to maintain long-term earnings growth.
Red Chip has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald’s. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald’s.
The article A Tasty Investment in a Bland Industry originally appeared on Fool.com.
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