Chipotle Mexican Grill (CMG)

Strong economics at the restaurant level are important because focused menu efficiencies and economies of scale fuel the high sales per unit that are reinvested back into premium food ingredients. The strength of the economic model is precisely why Chipotle can afford to spend more on food as a percentage of revenue than any other restaurant

Its image as a restaurant that uses high-quality, sustainably-grown foods could insulate it from perception problems that other fast food restaurants may face. Furthermore, the New Restaurateur program is empowering managers who can motivate employees, translating to better service and food. Chipotle is committed to improving its talent bench and already possesses one of the lowest manager turnover rates in the industry (25%).

Nouveau Mexican Fast food restaurants like Chipotle and Qdoba are catering to the Hispanic market to drive sales. According to the US Census Bureau, 14% of the US population is of Hispanic descent. Hispanics account for over $600B in purchasing power in the US alone and by 2050, 1 out of every 4 Americans will hail from a Spanish-speaking country or region. It is no surprise, then, that the burrito has become an American culinary staple and that the industry is adding Southwestern cuisine to its menu offerings. Chipotle – with its flavorful Mexican cuisine – is positioned to extract value out of this powerful demographic over the next 10 years.

Its image as a restaurant that uses high-quality, sustainably-grown foods could insulate it from perception problems that other fast food restaurants may face. Furthermore, the New Restaurateur program is empowering managers who can motivate employees, translating to better service and food. Chipotle is committed to improving its talent bench and already possesses one of the lowest manager turnover rates in the industry (25%).

It benefits from a broad trend towards Mexican food in the United States. Moreover, viral marketing approach is proving to bears that the Chipotle concept “travels well” – confirmed by our channel checks. Chipotle relies on a pull (vs. push) marketing strategy that includes giving free burritos away on opening day and making the first customer experience one that will propel new customers to return

Chipotle is also testing out a new POS system that should create an additional 4 transactions per 15 minutes, if optimally utilized. The device is being tested out at 50 stores and aims to boost throughput during peak (lunch) hours.

Chipotle has capable,enthused management molded in the McDonald spirit of management. CEO and staff are focused on quality which appeals to the younger and older generation.

Just about when everybody was ready to give up on Mexican food purveyor Chipotle (CMG), the Colorado-based company comes out and blows past the Street. Chipotle reported 52c for Q108 vs. consensus of 48c while revenues came in at $305.3M vs. $298.4M estimates. Chipotle also crushed the low-ball same store sales estimate for the quarter, coming in at 10.1% vs. 7% cons. More importantly, they guided to comps in the mid single digit range for FY08 vs. the low single digit comp guidance they doled out on the Q407 call.

Couple of tidbits from the conference call:

• CMG is seeing additional commodity pressures; this was expected and it’s why Chipotle is increasing prices 3% in most locales so that they can stabilize margins. Currently the company expects food costs to remain in the same range. Q408 inputs might jump up a bit because it has prices locked up until end of Q3 - avocado is already seeing an increase, and they expect to see a similar increase for rice and soy oil.

• They said they worked in a 10% price increase in New York (where they had not increased prices for 3 years) and customers didn’t freak out. This was key, we thought, since it continues the theme management carved out in the last time: our core customers aren’t ditching us because of $3.50 gas!

• On the marketing front, CMG is taking planned approach instead of running around like chickens with no head (no pun intended). Many of its markets they’re focused on are reaching that 100% all-natural level, which they want to leverage by way of advertising. CMG is still on track to open 130-40 more stores this year.

Bottom line: Comps were strong, guidance was strong. Shares are by no means cheap (fetches 40x our 08 EPS est of $2.70), but there’s still some steam to the story (we’re modeling 3000 units before CMG saturates the US), you can’t find a better unit economics model in the space, and you’ve gotta give management a high five here – they’re remarkably “streetable” for a company just 2 years in the public eye (IPOd 1/2006) and have found the right balance of promise/execution.

We maintain our buy rating & $130 price target. With shares still trading at the frothy end of the P/E range (peer group fetches ~18x), we suggest using trailing stops if shares ramp heading into the summer season.

chipotle has very little debt owed and also has a large cash reserve. The average time to pay off a new restaurant is 2.5 years. In addition to this, they are averaging 2 new restaurants a week nationwide. This self imposed limit is because they recognize the importance of properly trainig and hiring people friendly staff.