News

Chipotle Mexican Grill (NYSE: CMG) is a growth stock with management that is keenly focused on expanding the company's top line. There are two ways for a restaurant chain to do that, and the leadership team is focused on both of them. Here's what you need to watch at Chipotle over the next three years to make sure that the company is living up to its own plans.

Chipotle has five goals, but really only two

In Chipotle Mexican Grill's 10-K, there is a section titled "Business Strategy," in which it explains that it has five fundamental goals:

Sustaining world class people leadership by developing and retaining diverse talent at every level;

Running successful restaurants with a people accountable culture that provides great Food with Integrity while delivering exceptional in-restaurant and digital experiences;

Making the brand visible, relevant, and loved to improve overall guest engagement;

Amplifying technology and innovation to drive growth and productivity at our restaurants, support centers and in our supply chain; and

Expanding access and convenience by accelerating new restaurant openings in North America and internationally.

Those are all important, but they really can be distilled down into just two main objectives: run the existing restaurant fleet at a high level and open new locations. The first quarter of 2024 showed that Chipotle is capable of doing both quite well.

With regard to existing restaurants, same-store sales, which measures sales at locations open for at least a year, expanded at a roughly 7% clip. Half that level would be considered a pretty good result in the restaurant business, so whatever Chipotle's is doing with its brand concept is clearly resonating with customers.

Meanwhile, overall sales rose a touch over 14% to $2.7 billion. The only way that number gets significantly larger than same-store sales is by adding new locations. So, based on the numbers, Chipotle is firing on all cylinders today.

What about the future for Chipotle?

Chipotle currently operates around 3,500 restaurants globally. That's a pretty big number, but it is nowhere near as large as other brands with which it competes. For example, McDonald's has more than 41,000 locations around the world. To be fair, McDonald's is one of the largest restaurant companies on Earth, but it still suggests there's a huge runway for growth ahead. A more comparable brand might be Taco Bell, owned by Yum! Brands, which has around 8,500 locations and sales of nearly $16 billion.

So it looks like Chipotle could add another 5,000 stores at the low end. Its revenue, annualizing the first-quarter tally, would be somewhere near $11 billion today. That's about $5 billion lower than Yum! Brands' Taco Bell. Even if Chipotle never reaches the scale of McDonald's, the next three, five, and even 10 years are likely to be filled with growth. It's worth noting the company only opened 47 new locations in the first quarter. That's a pace of roughly 200 a year, which means that it would require well more than a decade to get to Taco Bell's scale.

There's no way for Chipotle to instantly reach the size of Taco Bell or McDonald's. It has to build that growth from the ground up while still executing well at its existing restaurants. That's not an easy task, and there are going to be bumps in the road along the way. Put another way, don't expect every quarter to be as good as Q1 2024.

But the next three years will still likely produce a lot of growth in the business. Perhaps the company "only" gets to 4,100 locations in that time, but that's still going to have a meaningful impact on the top and bottom lines. If you are considering investing in Chipotle today, well, very little has changed about its long-term growth story.

Paying up for growth at Chipotle

The problem with Chipotle is that Wall Street is well aware of its strong growth story. Looking at the most commonly used valuation metric, the stock's price-to-earnings (P/E) ratio is 63.5 versus a five-year average of 69.5. You can argue that P/E being below the long-term average suggests shares are cheap, but it is hard to call 63.5 a low number.

You are paying a premium for growth at Chipotle, which means this stock is most appropriate for more aggressive investors. Still, if history is any guide, Chipotle knows how to deliver what investors are expecting.

Should you invest $1,000 in Chipotle Mexican Grill right now?

Before you buy stock in Chipotle Mexican Grill, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Chipotle Mexican Grill wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $780,654!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of July 8, 2024

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.