Chipotle: Is The Guac Worth The Squeeze?

October 25, 2022
Consumer Discretionary

Back in February when Russia had just invaded Ukraine and it looked like food prices were going to skyrocket, we figured it could be years until we made another pick in the Food & Restaurant space.

But then Chipotle ($CMG) reported earnings recently and their stock price pulled off a strong recovery—getting them nearly back to pre-downturn levels.

But how is that possible? Shouldn’t they be getting crushed right now? Is this recovery sustainable?

Let’s get into the details and more! 👇

Chipotle Overview:

Look, everyone knows Chipotle. It’s a semi-upscale fast food restaurant specializing in burritos and other Mexican-based items.

CMG has been up and down, across the past few years — and responded to this year’s downturn and inflation worries by getting fairly oversold.

But things rapidly turned around during Chipotle’s earnings call in July when they announced they had maintained margins, grown productivity on a store-by-store basis, and generated bigger margins through online orders. 

What this boils down to is Chipotle is a margin powerhouse, especially as they’ve confirmed they will move forward with a 4% increase in prices in Q3/Q4.

Chipotle has done this in several quarters past and it shouldn’t affect top line revenue, merely expand their margins comfortably. But how can Chipotle afford this?

Its burritos are obviously not considered an “essential food”. Won’t rising prices impact demand?

 

A Tale of Two Downturns:

We’ve talked about this a lot, but we want to reiterate our thesis about the current macro environment:

Inflation only appears broad-base because energy prices and supply chains are causing all necessities to balloon in cost. This means the more affluent a consumer is, the less affected they are by rising prices. 

And as Chipotle put it themselves in their Q2 Earnings call, the lion’s share of Chipotle consumers lie outside the cohorts most affected by rising prices.

Put simply, Chipotle consumers already can afford chipotle. Therefore inflation will not prevent them from continuing to visit Chipotle.

 

Make it Quick and Make it Easy:

Furthermore, with online order revenue expanding 30%, Chipotle is establishing itself as one of the most convenience-friendly food plays out there.

Their marketing and operations teams have massively expanded how they get people in and out of stores as quickly as possible by utilizing online orders without overly relying on expensive 3rd party delivery services.

This has two main benefits:

  1. More people will buy burritos
  2. Customers can get through the restaurant faster, meaning each Chipotle location has the opportunity to be more productive and sell more burritos. 

This is the holy grail for margins, and the market is responding to this news really positively.

Plus, Chipotle’s supply chains are looking really robust, so any rise in food costs going into autumn can be absorbed by that planned 4% price increase as well.

 

Chipotle Outlook:

And that math makes it pretty simple for the analysts at Moby.co. Chipotle is making a bunch of small, productive moves all in the right direction.

We’re really excited to see how far they push this, but for now, the stock is prepared for a solid run in a very negative sector of the economy.

Guac still costs extra, but the margins there are definitely worth it.


Price Target: $1,800 (17% upside)

Current Price: $1,550

Target Date: Q1 2023

Rating: Overweight

Risk / Reward: Medium / Medium

Ticker: CMG

Market Cap: $43B

Dividend Yield: 0%

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