Chipotle Mexican Grill, Inc. (NYSE:CMG) has always been a favorite with food lovers on account of its healthy menu. The company uses more naturally raised meat than any other fast food chain in the US.
However, of late the sales trends have come down from the levels with which we have always associated Chipotle Mexican Grill, Inc. (NYSE:CMG). It did beat earnings estimates in the first quarter but it needs to do more to justify its valuation. The company reported earnings of $2.45 per share against consensus estimates of $2.14 per share. The stock is trading at 28.58 times its forward earnings.
Presently, Chipotle Mexican Grill, Inc. (NYSE:CMG) is trying out various strategies and options. But will any of these moves brighten its long-term prospects? Let us take a closer look to see if we can find any winning strategies.
Strategy 1: Store expansion
Chipotle is expanding its store base to compensate for its soft same store sales growth. This is evident in Chipotle Mexican Grill, Inc. (NYSE:CMG)’s first quarter results. There was a sizable revenue growth of 13.4% to $726.8 million while comparable stores sales were up by just 1%.
What is significant is that the company opened 48 new outlets in the first quarter alone and is planning to open a total of 165-180 outlets through the year. And this comes after 200 new store additions last year.
This is not a bad strategy if you consider the competitive pressures that have left most fast food chains struggling to grow their comps. Even McDonald’s Corporation (NYSE:MCD)’s has reported a 1% decline in its US same store sales in the most recent quarter. However, Chipotle Mexican Grill, Inc. (NYSE:CMG) needs to focus on growing its sales from existing stores as this has a direct impact on profitability.
This takes on an added dimension if you consider that the company is in any case facing a margin squeeze on account of the rising food costs. Currently, food costs account for one-third of the total revenue. The situation has almost come to a point where if Chipotle raises prices it risks losing its customers and if it doesn’t its margins go for a toss.
Strategy 2: New Brand
Chipotle is launching its second brand, ShopHouse Southeast Asian Kitchen where it would be serving oriental fare like noodle bowls, curries, and stir fries. The first ShopHouse outlet opened in Washington, DC, in September 2011 and now the company is planning to open three more over the coming months.
Again there is nothing wrong with the strategy per se. But Chipotle Mexican Grill, Inc. (NYSE:CMG) is still a relatively new brand and any wrong moves with the new ShopHouse brand can negatively affect the core business. So instead of trying to build a fresh brand with a completely new cuisine it might have been better if the company had stuck to what it does best and that is serve excellent quality Mexican fare.
And if it had to diversify, international expansion of the core chain was always a good option. The company has only 12 restaurants outside the US and has not even ventured into Asia where the entire band of fast food players is setting up shop. Yum! Brands, Inc. (NYSE:YUM) Brands! introduced Taco bell restaurants in China way back in 2003.
Strategy 3: Menu Expansion
Finally let us talk about the recent menu expansions that are happening at Chipotle. There are two new things on the horizon that look exciting.
The company is introducing a new premium Patrón margarita which will hit the menu from end of April. This is an exciting possibility as not many fast food outlets offer alcoholic beverage option. However, this is not a new concept for Chipotle as it already serves margaritas. But what is new is that instead of using a ready-made mix to stir up the drink the company will now hand-make them using simple ingredients.
