This Fast-Food Stock Served Up Healthy Gains in Q4

One of the hottest stocks on Wednesday was Chipotle Mexican Grill (NYSE:CMG), which crushed earnings estimates in the fourth quarter as diners flocked to its chain of restaurants in droves.

The performance was more impressive in light of the fact that two of its competitors, McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX) both missed revenue estimates for the same quarter.

Chipotle stock was up about 9% on Wednesday as of late afternoon.

Chipotle opened a record number of new restaurants last year

The numbers were indeed impressive for Chipotle, as its revenue increased 15.4% year over year in the quarter to $2.5 billion, fueled by an 8.4% increase in comparable-restaurant sales. The spike in sales was buoyed by a 7.4% increase in transactions and a 1% rise in the amount of the average check. The chain also opened 121 new restaurants in the quarter, further boosting its overall sales.

Chipotle’s revenue gains were offset somewhat by operating expenses that were 14% higher year over year to $2.15 billion. The biggest chunk of that was in food, beverage and packaging costs of $747 million, or 29.7% of total revenue. That’s up from $639 million, or 29.3% of total revenue in the year-ago quarter. Chipotle’s food costs increased due to inflation and a higher mix of beef across the menu, which was offset slightly by lower paper costs.

On the bottom line, the company generated net income of $282 million in the quarter, or $10.21 per share, which is 11% higher than the fourth quarter of 2022. The operating margin at the restaurant level improved to 25.4% from 24% in Q4 2022.

For the full year, revenue jumped 14.3% to $9.9 billion, while comparative-restaurant sales rose 7.9% compared to the previous year. Net income spiked 38% to $1.23 billion, or $44.34 per diluted share, while the restaurant-level operating margin climbed 230 basis points to 26.4%. Chipotle also opened 271 restaurants in all of 2023 — a record for the company.

Brian Niccol, chairman and CEO at Chipotle, said, “2023 was an outstanding year where we delivered strong transaction growth driven by throughput and menu innovation, opened a record number of new restaurants, surpassed $3 million in AUVs (average unit volume) and formed our first international partnership.”

That international partnership, signed in July with international franchise retail operator Alshaya Group, will expand Chipotle’s footprint into the Middle East. The first new restaurants to open through this partnership will be in Dubai and Kuwait this year.

More growth ahead

Chipotle had 3,437 restaurants worldwide at the end of 2023, with the goal of doubling that to 7,000 locations over the long term. Most of them are in the United States, but there are also locations in the United Kingdom, France and Germany.

In 2024, Chipotle expects to open between 285 and 315 new restaurants, including some in the Middle East as part of that new agreement. As for sales growth, the fast-casual dining chain projects to have comparable-restaurant sales growth in the mid-single-digit range for 2024, compared to 7.9% growth in 2023.

Chipotle stock has been a juggernaut over the past five years. In 2023, it returned 65%, and over the past five years, it has a ridiculous 38% average annualized return as of Feb. 7. Additionally, its 10-year annualized return is a robust 17.8%.

The incredible growth and success of Chipotle has increased its valuation, as it has a high price-to-earnings ratio of 56 and a forward P/E of 46. While I definitely like the stock, that seems a bit too high. I wouldn’t be surprised to see it flatten out a bit based on projected lower same-store sales growth, the high valuation, and an uncertain economic environment in the near-term.