Chipotle Mexican Grill Continues To Thrive, But Valuation Looks A Bit Stretched

With Chipotle Mexican Grill (NYSE:CMG) up over 20% following my initial write-up ahead of earnings, I wanted to take a closer look at its Q1 results.

Q1 Results

For Q1, CMG saw its revenue soar 17.2% to $2.4 billion. That topped analyst estimates calling for sales of $2.34 billion.

Comparable restaurant sales jumped 10.9%. Net check was up about 7%, with prices up 10% (8.5% instore and 1.5% for delivery) and mix having a -3% impact. Traffic was up around 4%.

Adjusted EPS came in at $10.50, easily surpassing analyst estimates by $1.55.

Discussing some of the drivers of the quarter on its Q1 call, CFO John Hartung said:

“We continue to look for ways for the Chipotle brand to be more visible, more relevant and more loved. And we had a couple of very exciting new menu innovations that did just that. We responded to a real-time opportunity to support our passionate TikTok fans who wanted Fajita Veggies, and Chipotle Honey Vinaigrette as options for our digital exclusive quesadilla. We work with 2 popular TikTok food reviewers who made the idea go viral at the start of the year and leverage our strength in digital marketing and culinary to create an exciting new menu item, utilizing all existing ingredients. The results have been outstanding.

“During the launch, we nearly doubled our quesadilla business and had 2 of our top digital sales days of all time. We have decided to make this a permanent menu item as the addition of Fajitas to our quesadilla along with dipping it in a combination of our Honey Vinaigrette and sour cream is really delicious. The best part is that it's made of all existing ingredients, which limits additional complexity in our restaurants, and we continue to see incremental quesadilla sales because of this launch. We also launched Chicken Al Pastor as a limited-time offer. Al Pastor has been gaining mass appeal in recent years, and we tapped into these consumer trends to offer our own spicy spin on Al Pastor with our freshly grilled chicken.”

Restaurant level margins were 25.6%, a 490 basis point year-over-year increase. RLMs benefited from higher sales, labor efficiencies, and lower avocado prices.

Cost of sales for the quarter was 29.2%, a decrease of -180 basis compared to the prior year. Menu price increases and lower avocado prices more than offset a mix headwind. Labor costs as a percentage of sales were 24.6% a -170 decrease versus a year ago, as sales leverage outweigh wage inflation.

The company opened 41 locations in the quarter, of which 34 had a Chipotlane.

CMG bought back $131.6 million in stock at an average price of $1,552.90 in the quarter.

This was an outstanding quarter from CMG, which really showed its pricing power. Despite two price increases last year, the company showed it is still able to drive traffic, both from higher income consumers, as well as lower income customers. At the same time, the company also showed great operating leverage, nicely improving restaurant level and operating margins.

Outlook

For Q2, CMG forecast comparable-restaurant sales to grow in the mid- to high-single digit range. It is looking for similar growth for the full year. Management said that the transaction trends from Q1 continued into April. The company will lap two menu increases this year, one from late March and one from August.

The company does expect margins to improve in Q2, as it is a seasonally stronger sales quarter and has relatively lower marketing spend. In the second half, it anticipates continued mid-single digit labor inflation, as well as a possible increase in avocado and other food prices. So far, though, the company said it hasn’t seen a lot of food inflation, so it is a wildcard.

Currently, the company does not plan on taking any price increases, although that could change. Guidance also assumes no big changes to the current macro environment, so it is not baking in any type of recession.

Discussing the company’s outlook on its Q1 call, Hartung said:

“We did say our guidance assumes that there's not a meaningful change in the macro environment, okay? Because obviously, all bets are off that happens. But in terms of our outlook, our base case does not include a recession or certainly not a meaningful recession. Again, it looks like unemployment is holding up really well. It looks like consumer spending is strong right now. I mean, we saw softness in the second-half of last year, especially the fourth quarter in lower income consumer. We saw those consumers come back almost at the same rate as our higher income consumers. And so we see that as a positive in a positive macro sign. So we're cautiously optimistic about what's going to happen in the second half of the year.

“Now if there is a recession, we feel like we're really well prepared. We own all of our restaurants. We don't have any debt. So we don't have the possibility of franchisees under pressure if they have debt payments and that there is a softening of demand. And we don't feel like we have to run the business based on a quarter-by-quarter and tally. So if we need to write a couple of tough quarters here or there, we certainly think we have the financial wherewithal and we have the long-term view to do that. But again, we're cost optimistic that the economy will hold up.”

The company said it remains on track to open 255-285 new restaurants this year. This includes 10-15 relocations to add a Chipotlane. About 80% of the new locations will have a Chipotlane.

With no price increases set for this year, it's not surprising that Q1 will likely mark the peak in same-store sales. However, the expected traffic gains remain strong. A recession could derail that, so there is some risk if the consumer starts to weaken. That economy remains a big wildcard for most consumer-oriented names as we progress through the year.

Valuation

CMG stock trades at 31x the 2023 EBITDA consensus of $1.93 billion and 26.4x the 2024 EBITDA consensus of $2.27 billion.

From a P/E perspective, it trades at just under 47x the 2023 EPS estimate of $44.35. Meanwhile, it's valued at about 39x the 2024 EPS estimate of $53.34.

It's projected to grow revenue 14.3% this year, and have mid-teens revenue growth over the next several years.

Outside of Wingstop (WING), CMG is one of the highest valued QSR out there. Notably, WING uses a franchise model, which tends to get higher valuations.

Conclusion

As I noted in my first write-up CMG is a great company, and it's Q1 results certainly demonstrate that. They were fabulous, no question about it. The company is doing well, and it still has expansion opportunities ahead, especially as it has shown its ability for new stores to do well in smaller markets.

The biggest issue when looking at the stock is its valuation, which is up since last time I looked at it. The valuation can be justified, but at current levels the stock could certainly take a hit if we see a recession. The economy is the big question mark at the moment. If I owned the stock I'd continue to "Hold" as its long-term prospects remain solid, but I'd only be a new money buyer on a dip. There is just too much economic uncertainty for me to pay up for a restaurant name at this point, and the market is acting as if this group is completely recession proof.