The fast-casual chain earned $112.9 million, $3.99 per diluted share on revenue of $1.43 billion for the quarter ending in June. Same store sales were up 10% from the previous year. Operating margins also rose to 8.4% from 5.4%.
The reaction from the investor stands was cheering and buying. The shares rose over 5% and were due to open July 25 at about $778 each. The chain’s market cap is now $21.49 billion. That’s 87 times last year’s earnings.
CMG’s Turning Point
The turning point for Chipotle was the hiring of Brian Niccol as CEO in February 2018. Niccol had previously been credited with the turnaround at Taco Bell but was not going to replace Greg Creed as YUM CEO. YUM, which is based in Louisville, was also not going to move its headquarters to Niccol’s home in southern California.
Chipotle, which had been based in Denver, was willing to move for Niccol, and is now based in Newport Beach. The move let Niccol quickly clear-out his predecessor’s old management team. Chipotle also gave Niccol a higher salary than Creed earns at Yum, $5.4 million. Right now, that looks like a better bargain than a $10 burrito lunch.
That’s because Niccol predecessor Steve Ells, who had been with the company since it opened its first store in 1993, suffered a stunning series of reversals starting in 2015. These included outbreaks of food-borne illness, a cocaine scandal, malware, reports of rats and a new queso sauce that food critics laughed at.
During the crisis, hedge fund investor William Ackman bought a stake of nearly 10% in Chipotle. He sold out a year after Niccol’s hiring, missing much of its recent rise.
The Niccol Touch
Investors expressed joy over Niccol’s hiring. Since then the share price has more than doubled.
Niccol has reinvented the company, adding an app-based rewards program similar to that of Starbucks (NASDAQ:SBUX). He has also tweaked the menu to extend its reach beyond lunch into the snack periods where Taco Bell shone.
In the wake of the latest earnings report, Niccol said “we’re just getting started.” He said better marketing, better operations and better-tasting food had all worked to bring back customers. Digital sales are soaring.
Last year Niccol experimented with milkshakes, quesadillas and added salad-based “lifestyle bowls.” Recently Chipotle has been testing such items as lemonade, nachos, and carne asada, which is thin-cut instead of thick-cut beef. The next big addition will be ovens that can improve the quesadillas, bring back the nachos, and let it add desserts.
The Bottom Line on CMG Stock
Investors may be right to question how much further the stock can run. It sells at over four times sales. Management guidance is that same store sales should only grow at single-digit rates from here. But past warnings about its momentum were rightly ignored as the stock has continued going up.
Thanks to the turnaround, Chipotle is now in position to acquire other chains. It is worth twice Domino’s Pizza’s (NYSE:DPZ) $10.8 billion valuation. It has even passed Restaurant Brands (NYSE:QSR), which owns both Burger King and Tim Horton’s. CMG now sports more than half the market cap of YUM itself.
Chipotle can always grow by adding more restaurants or moving into Europe and Asia. But until Niccol shows off his next trick, investing new money here is a speculation.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear , available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in QSR.