Regular visitors to InvestorPlace are well aware of the negative press and investor sentiment surrounding Chipotle Mexican Grill, Inc. (NYSE:CMG), the high-flying restaurant stock grounded by E.coli outbreaks from some of its locations in several states.
Since the outbreaks first came to light on or about Oct. 31, 2015, CMG stock has lost 37% of its value through Aug. 2. Interestingly, thanks to poor sales, CMG stock had already begun its descent before the tainted food scandal hit the restaurant best known for being a healthy alternative to its QSR competition.
There is no doubt CMG stock, which had racked up impressive annual gains in five out the six years prior to 2015’s scandal-ridden decline, is on investors’ naughty list. A quick look at the InvestorPlace stock page for Chipotle provides several damning articles by InvestorPlace contributors painting an awfully dim outlook.
One in particular, by James Brumley, a writer I respect very much, points out that Chipotle’s recent announcement it would open its first Tasty Made burger restaurant in Lancaster, Ohio, is nothing but a distraction for a restaurant operator badly in need of a morale boost.
A Different Take on CMG Stock
Normally, I agree with the “focus” argument when it comes to businesses looking to diversify their interests. Nine times out of 10, it’s nothing more than chasing down the rabbit hole.
However, in this case, I believe Chipotle going back to its roots (as Brumley mentioned, McDonald’s Corporation (NYSE:MCD) once owned CMG) is a much-needed distraction from putting out fires. It sends the company back on the offensive into a growth and innovation mindset, rather than simply waiting for the next shoe to drop.
If Yum! Brands, Inc. (NYSE:YUM) can successfully operate three brands: Pizza Hut, Taco Bell and KFC, I don’t see why Chipotle can’t aspire to do the same. Don’t you think YUM has had to learn the hard way about running restaurants? Think China and its chicken scandal. Adversity makes you stronger for the next challenge or setback that comes your way.
With the addition of Tasty Made (love the logo), Chipotle now offers three potential growth concepts, the other two being ShopHouse and Pizzeria Locale, with 15 and 4 locations opened as of the end of June, respectively.
Financially, I realize their revenues are a blip on the radar, but businesses must look forward if they are to survive and thrive.
Yes, its Q2 2016 numbers were anything but inspiring, but you must walk before you can run. The fact that it made $41 million in operating income in the second quarter versus an operating loss of $47 million in Q1 is a testament to Chipotle’s staying power.
As of June 30, the average Chipotle restaurant generated $2.1 million in annual revenue. That includes four months prior to the E.coli outbreak. One year earlier, in Q2 2015, that average was $2.5 million or $208,000 in revenue per month.
Where’s the bottom? Around $1.7 million per restaurant based on $2.5 million prior to the outbreak less four months at $208,000.
What does it mean for the future?
Historically, since 2010, Chipotle’s operating margins varied between 15.4% (2011) and 17.3% (2014). For the trailing 12 months, it has been cut in half to 8.2%. Its operating margin for Q2 2016 was 4.1%, half that, again.
With 2,124 restaurants open at the end of June and another 106 to be opened in the second half of fiscal 2016 (114 opened in the first two quarters; 220 to 235 expected to be opened in 2016), total revenues should be approximately $3.8 billion ($1.7 million per restaurant multiplied by 2,230 locations) or $700 million less than in 2015.
Lower down the income statement its operating profit should be $152 million (estimated 4% margin), an 80% decrease from a year earlier and on par with its performance in 2008.
It’s ugly, I know.
But, as the old saying goes, “This too shall pass.”
And when it does, consider this: 2,230-plus restaurants generating $2.1 million in revenues per unit at 17% operating margins translates into $800 million in operating profits. At its all-time high of $758.61 in 2015, investors were willing to pay 25 times trailing operating profits. Today, that sits around 11 times trailing operating profits.
In the next 12 to 18 months, if CMG hits above the numbers per restaurant noted in the previous paragraph, you’re getting CMG stock at a significant discount.
Not to mention Tasty Made’s potential would be thrown in for virtually nothing.
It’s a big if, but not nearly as big in my opinion as many of its detractors might think.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
