Wednesday, February 10, 2021

Would you pay $43 billion for this?

This business earned $356 million net last year, up slightly from $350 million the year before. Would you be surprised if I told you it is valued at $44 billion? That is 7 times sales and 124 times earnings.

It should be obvious it's a restaurant that owns its locations (not a franchising company). The COGS consists of food and labor. A small net profit margin: under 6%.

It's Chipotle Mexican Grill, Inc. The Twitter account @MiserlyScoops is the story of Chipotle's attempts to eke out margins through stingy portion control. In 2015, net margin was 10.5% net margin on smaller sales.

I wonder whether they were benefiting from covid? As the economy reopens, people could be expected to switch from fast casual concepts with really good online ordering and OCD/germaphobe packaging and pickup over to other types of restaurants that are better to hang out.

Something like this could be interesting both as a hedge for value ideas and also as a reopening trade. Mostly we are interested in reopening longs - like energy and community banks. But we are also interested in reopening catalyzing an end to the growth vs value out-performance, and a very logical way for that to happen would be ultra-expensive covid lockdown trades (like ZM and perhaps CMG) to get crushed.

There is also the chance that even if their sales survive the reopening (and perhaps they will, with office workers eating there for lunch again instead of locked-down people getting delivery) their already small margins will get hurt by inflation. Chipotle Inc is a big bet on the spread between what people will pay for a stingy burrito, and the labor and ingredient cost to make it:

Food, beverage and packaging costs were 31.0% of total revenue, a decrease of 210 bps compared to the fourth quarter of 2019. The decrease was primarily due to the benefit of menu price increases, along with better waste control and a more favorable protein mix, partially offset by fewer sales of high margin beverages and higher dairy pricing.

“More favorable protein mix” = soy? Sounds like they’re feeding livestock.

1 comment:

CP said...

This article really points out that Chipotle has a SERIOUS issue with order size and frankly they aren't close a lot of the time. While I don't eat at McDonald's often I do know that when I order a Quarter Pounder it cooks down to roughly .3 pounds EVERY SINGLE TIME! It's even advertised as such. Chipotle seems to be straddling the line between pre-cooked and cooked and while it doesn't need to be exact, it should at least be close, and as the pictures above show, that's not the case. Also, as I am sure people will see from the comments on this post, I AM NOT ALONE. That's why this issue resonates with people.