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Why Chipotle’s stock price keeps soaring

Its regained financial model and a dearth of public growth chains have helped its valuation skyrocket during the recession, says RB’s The Bottom Line.
Photo courtesy of Chipotle Mexican Grill

The Bottom Line

Remember the old days when we all wondered whether Chipotle Mexican Grill would get back to $700 a share?

On Friday, the Newport Beach, Calif.-based fast-casual chain hit $1,300.

Even that doesn’t quite appreciate Chipotle’s stock performance, which has somehow bested its pre-food-safety-problems levels. In March, when concern about the direction of the pandemic was at its peak, the company’s stock was cut in half, down to $415 per share at one point.

In other words, if you were smart enough to buy Chipotle stock back then, you’d have tripled your investment in just a few months.

For the year, the stock is up 83%.

The performance is the result of a remarkably strong comeback by the company, the return of a business model that has few if any peers in the restaurant industry, confidence that its strategy will work long-term, and a dearth of growth companies on Wall Street.

Let’s take that last part first. There are few true growth chains on the public markets. Most restaurants are either legacy chains, casual dining companies or small chains that are either struggling or are coming out of the pandemic with major question marks.

If you want to invest in a restaurant chain that can grow earnings by 20% or more a year for some time, there are few choices. And those choices that are available can attract outside valuations as a result. Chipotle is the biggest name in that group. Yet it has a long runway of growth—CEO Brian Niccol just told Yahoo that he believes the chain can get to more than 6,000 restaurants, more than doubling its size.

To be sure, such prognostications can often be full of hot air. But Niccol has a lot of credibility at the moment, and his track record certainly suggests the company can easily achieve that goal.

Chipotle’s business model can certainly help it do so. When sales plunged in 2016 after a series of food safety incidents the year before, the company lost a model that enabled it to pay off its new units in a year and a half.

Its restaurant margins haven’t quite returned to those pre-2016 levels—last year they were 20.5%, still far off that peak. But still much stronger than most chains. And Chipotle has no debt and a ton of cash and its sales growth—same-store sales rose 11.1% last year and were accelerating before the pandemic hit—suggests it can certainly get there.

Chipotle’s biggest wins under Niccol have been digital sales and marketing. The company’s digital second make line has been a revelation for the brand, helping it to serve digital customers more quickly, which fuels more sales. The company has been innovating on that front, deploying a growing number of mobile-order Chipotlane drive-thru lanes to effectively keep those customers separate from traditional in-store customers.

And the company’s marketing has pushed digital sales hard, as Chipotle did this week with its innovative Chipotle quiz that earned customers a buy-one, get-one offer if they aced the exam.

Perhaps most notable about the company in 2020 is its aggressiveness. As we reported last month, Chipotle has been cold-calling existing operators of restaurants in locations it wants, offering to buy out their leases.

That was an almost-unheard-of level of aggressiveness on the part of a restaurant chain. But it demonstrates what a company can do when it has a ton of momentum and a financial model that gives it some breathing room like that.

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