With its unique fast-casual dining concept focusing on fresh and high-quality ingredients, Chipotle Mexican Grill has emerged as one of the most popular restaurant chains in America. Investing in Chipotle stock can offer investors exposure to the continued growth of fast casual dining. There are a few key things to consider when evaluating Chipotle as a long-term investment opportunity.
Firstly, Chipotle operates an asset-light business model with strong unit economics. The average Chipotle restaurant generates over $2.5 million in annual sales with attractive restaurant-level margins. This allows the company to generate steady cash flows to fund expansion. Secondly, digital sales now account for nearly 40% of Chipotle’s business. Its investments in digital innovation and delivery partnerships provide additional sales growth opportunities going forward. Lastly, Chipotle still has considerable room for new restaurant growth. It plans to open 235-250 new restaurants annually over the next several years, representing roughly 8-10% unit growth per year. With Chipotle stock trading at a reasonable forward P/E ratio around 30x, the company appears to be a solid long-term investment in the fast casual dining space.
Chipotle has an attractive asset-light business model and economics
One of the appealing aspects of investing in Chipotle is its high-margin asset-light business model. Unlike other restaurant chains, Chipotle owns very few of its actual restaurant locations. The majority are leased. This means very low capital expenditure requirements. At the restaurant level, the business can generate 25%+ restaurant margins due to its simple menu and focus on throughput. The average Chipotle unit does over $2.5 million in sales. With minimal rental costs and no major renovation requirements, new restaurants can achieve payback very quickly. As a result, Chipotle generates significant free cash flow, which it uses to open new locations and invest in the brand.
Digital and delivery are major growth drivers
In recent years, Chipotle has made major investments in its digital and delivery capabilities. Customers can order ahead on Chipotle’s app or website for quick pickup or delivery. Delivery partnerships with third parties like DoorDash have expanded Chipotle’s reach. These initiatives are paying off. In Q2 2022, digital sales made up 39% of Chipotle’s total sales, demonstrating the strength of its digital platform. Digital not only provides added convenience to customers but also helps increase order sizes and loyalty. As digital sales continue growing as a percentage of the total, it gives Chipotle an additional lever for sales growth on top of opening new restaurants.
Significant room remains for new restaurant expansion
As of 2022, Chipotle operated over 3,000 restaurants primarily in the U.S., illustrating that there is still considerable white space. Management sees the potential for Chipotle to eventually grow to 7,000 locations in North America alone. The company’s real estate strategy targets a mix of traditional freestanding locations as well as non-traditional sites like college campuses, airports, and strip malls. Chipotle plans to open 235-250 new restaurants in 2023, representing high single digit unit growth. If executed well, this expansion pace can allow revenues and profits to steadily march higher for many years to come.
With a loyal customer base, differentiated fast casual concept, growth in digital, and new unit expansion all contributing to steady sales and earnings growth, Chipotle stock presents an appealing option for long-term investors looking for exposure to the ongoing rise of fast casual dining.