🥗More Guac Please, Chipotle Post Split
And Apple back on top?
Good morning,
Chipotle’s stock, CMG 0.00%↑ has always been such a novelty to me. Valued at a whopping $81.73B as its market cap (as of July 8th, 2024), Chipotle is worth more than TGT 0.00%↑ , PYPL 0.00%↑ , K 0.00%↑ and F 0.00%↑. The behemoth of stock finally decided to split 50-to-1 on June 26, and now the stock is at $59.51/share. Similar to most post split scenarios, there has been quite the retracement from profit taking.
On the surface, it seems ridiculous that a restaurant chain can be valued so high. DPZ 0.00%↑ is only valued at $16.67B, which puts Chipotle at almost 5 times more valuable than Domino’s Pizza. Is this valuation reasonable? Regardless, you’ll be surprised what’s inside this burrito of Chipotle’s financials.
🌯Past Burrito/Bowl Performance
To set the stage, we have to talk about Chipotle’s 2023 performance. Chipotle managed to generate over $9.9 BILLION in revenue, which is actually a 14% increase from 2022 ($8.64B). The company’s EPS saw a 38% increase going from $32.04 in 2022 to $44.34 in 2023. Incredible performance right?
It seems like the company’s performance isn’t slowing either, with Q1 of 2024 net income increase 23%. Chipotle even stated that traffic to their locations increased 5.4% YoY.
How in the world is Chipotle operating so well?
I think the key point in Chipotle’s success is not burning cash to open new locations without having already optimized existing stores. A great example of opening new stores backfiring is Starbucks.
The stock has dropped over 20% YTD because revenues began dropping AND competition in China is stalling their expansion plans. They touted a “new store every 9 hours” in the country. You’ll probably have noticed that existing Starbucks’s are emphasizing to go and pick up orders. New Starbucks locations might even be just pick up/to go orders. Despite this, Starbucks still saw declines in revenue because users on their app are adding things to their cart but end up ditching their order.
CNBC tries to bail out Starbucks and other food giants stating that consumer spending is pulling back, yet Chipotle’s outstanding performance this quarter proves otherwise! The drop in revenue for certain food industry companies could just be a drop in retention in existing store sales. I think that’s a big misconception some companies will have when talks of growth come to the table. Growth doesn’t always have to mean more locations and expansion. Growth can also mean optimizing existing store/business operation systems.
🥗Let’s do a comparison:
Chipotle’s CEO recapped that his strategy was focused on improving “throughput”, which is the amount of product that can be pushed out in a certain period of time. It’s essentially rate of production, or, how fast a customer can order and get their food. This paid off tremendously, with existing store sales increasing 7% YoY. With the world being more accustomed with picking up orders and not dining in, ordering and paying needs to be as seamless as possible to close sales. Chipotle clearly recognized this: 37% of Q1 2024 sales were from digital orders via their mobile app or their website. A key component of capturing these sales was through their “Chipotlane” to help customers quickly pick up their online orders.
On the other hand, Starbucks same store sales declined by 3% in their most recent quarter. Despite mobile ordering being up over 400% in 5 years, the company saw traffic decrease by 7% and revenue declined. The CEO credited their downfalls to poor infrastructure for handling online orders. The company is still rolling out an over billion dollar plan to improve their internals systems, but this restructuring period has allowed competitors to catch up. More coffee shops are opening up with comparable (if not better) benefits, and Starbucks’s financial performance is paying the cost.
What happens after optimizing existing systems?
After existing systems have been proven to be optimized and growth is in the right direction, you can start thinking about expanding. Post COVID, Starbucks was still building new locations with lots of seating and space instead of focusing on mobile orders. Now those locations incur a heavy cost without much payout since customer sentiment adjusted to mobile ordering.
Chipotle opened 271 new stores in 2023, with plans to open at least 285 stores in 2024. Sitting at around 3,500 stores, Chipotle aims to have 7,000 locations in North America. What’s important here is that new stores feature the successful Chipotlane format instead of the traditional Chipotle store design. The company actually found that these new Chipotlane locations have higher volume, and in effect larger returns since they don’t have as many operational costs.
🌯
So in this burrito, we have the following ingredients:
Increasing margins
Healthy store expansions
Optimized digital strategies
Also, Wall Street’s consensus is an overweight rating with the median price target at $67.69. With all things considered, I think the stock split has only welcomed new investors with a more affordable price tag. I can confidently say that CMG 0.00%↑ should be considered in any long term portfolio that is looking for some diversification away from tech.
🧑💻AAPL On Top Again
As of July 10, AAPL 0.00%↑ has taken the crown from MSFT 0.00%↑. Sitting at a market cap of $3.51T, Apple has overtaken Microsoft which is at $3.42T.
This can be attributed to Apple finally breaking the silence on how they’re utilizing AI at their most recent WWDC conference. The biggest takeaway from the conference is probably the planned integration of OpenAI’s ChatGPT into Apple’s software system. Only time will tell if this is all hype, with how every company mentioning AI sends their stock higher. Apple’s stock has since sky rocketed to new all time highs.
Regardless, the opportunities are definitely there for revenue expansion. Apple’s service division encompasses licensing deals for software to be run on its platform as well as generative AI applications. Similarly, AMZN 0.00%↑ has invested heavily into generative AI. It will be interesting going forward to seeing how well these companies will be able to utilize AI advancements. Bullish enthusiasts on Apple want to see future quarterly reports that show an increase in users and a rise in revenue in the respective divisions.