Understanding Chipotle's Financials (CMG)

Chipotle Mexican Grill, Inc. (CMG) is the developer and operator of Tex-Mex-style fast-food restaurants with a menu focusing on burritos, tacos, burrito bowls, and salads. The company was founded in 1993. Chipotle has been reporting some industry-leading growth over the past several years, catching the attention of investors. Through the first quarter of 2024, Chipotle's share price had increased 80% over the previous year, part of the reason its board approved a rare 50-to-1 stock split in late March 2024.

As of Dec. 31, 2023, the company had 3,437 Chipotle restaurants, each with a simple menu that consumers can customize. The restaurant chain has also been moving into ecommerce, including a platform for a farmers' market within its supply chain. While the company's savvy marketing campaigns and alternative menu have been well-received, it remains to be seen if Chipotle can sustain its rapid growth in the highly competitive fast-food industry.

Chipotle's Revenues & Financials

The top line of Chipotle's income statement shows impressive revenue growth. In fiscal year 2023, Chipotle had a year-to-year revenue growth rate of 14.3%, with $9.9 billion in total revenue versus $8.5 billion in 2022. The company had an operating margin of 26.2%.

During the fourth quarter of 2023, its board of directors approved a stock buyback of up to $200 million. Near the end of the first quarter of 2024, the board approved a massive 50-for-1 stock split after reaching a record share price of about $3,000. This move will make it more affordable for individual investors and company employees to put money into Chipotle stock.

Few restaurants have achieved such high growth rates due to Chipotle's market share demand, strong brand equity, and ability to generate repeat sales.

Operating Expenses

Along with increases in revenue, expenses rose as well, which can be expected because if a company sells more products, it has to purchase more raw materials and hire more workers to meet the demand. The table below shows the major operating expenses for Chipotle.

Net Income

While reporting the lowest margins across the industry, the company has reported some of the highest net income growth. This means there is room for improvement that might lead to further growth.

For fiscal year 2023, CMG had an operating income of $1.6 billion, a 38% improvement from the previous year. Its net income was $1.23 billion, a 36% rise since 2022. Diluted earnings per share were $44.34, an increase of 38.4% from the previous year.

Margins

Margins are an important metric in the restaurant business for established companies reporting high margins and exemplary business efficiency. While Chipotle has been booming, its margins have sometimes lagged behind competitors, and are a key area of focus for industry analysts.

In 2023, CMG's operating margin was 15.8%, an increase from 13.4% in 2022. Some reasons for this are the increase in the number of restaurants and the installation of new technology in existing restaurants to allow for digital ordering.

Valuation Metrics

Managing its capital and integrating new projects are critical concerns for Chipotle's senior management. The company's focus on new technologies and expanding the number of its restaurants will likely impact margins and investor returns in the near term. This can be seen in some of Chipotle's valuation metrics.

As of the end of the first quarter of 2024, Chipotle's five-year annualized return on assets was 7.08%, and its five-year annualized return on equity was 16.41%, both in line with most of its competitors. Chipotle's price-to-earnings (P/E) ratio was about 66, and its price-to-sales ratio was 8.2. These valuation metrics suggest that investors have high expectations for the company's future growth and profitability, increasing its stock value by almost 80% over the previous year.

Effect of COVID-19 on Chipotle's Financials

The pandemic posed significant challenges for Chipotle, as it did for the entire restaurant industry, with mandated dining room closures, social distancing, and other safety concerns. However, Chipotle met these challenges by rapidly expanding its digital sales channels, including online orders, delivery partnerships, and a mobile app, which helped offset losses from in-person dining. With dining rooms closed or operating at reduced capacity, Chipotle heavily promoted its digital ordering platforms (app and website) for pickup and delivery. It has expanded partnerships with third-party delivery services like DoorDash Inc. (DASH) and Uber Eats from Uber Technologies Inc (UBER). As a result, digital sales grew dramatically, increasing by 174% year-over-year in 2020, accounting for more than 46% of total sales that year.

Chipotle's Management

Chipotle has an experienced management team with extensive industry experience. In March 2018, it appointed Brian Niccol as its CEO. In 2020, he assumed the role of executive board chair from founder Steve Ells. Other senior managers include Chris Brandt, Curt Garner, John Hartung, Laurie Schalow, Marissa Andrada, Scott Boatwright, Roger Theodoredis, and Tabassum Zalotrawala.

The Bottom Line

Chipotle has exceeded industry growth in revenue while offering an alternative to many of the classic fast-food restaurant brands. It has also made significant strides in implementing digital technology that allows customers to order online and pick up at the store. This is an important growth factor as e-commerce sales have increased. The company's capital initiatives have been successful, and its outlook is generally positive, with its P/E remaining high. It has faced some challenges in food quality, and its margins remain low, which will be factors to watch as the company expands.