Understanding Chipotle's Financials (CMG)

Chipotle Mexican Grill, Inc. (NYSE: CMG) is a well-known developer and operator of restaurants with a menu that focuses on burritos, tacos, burrito bowls and salads. The company was founded in 1993. It has been reporting some industry leading revenue growth that has garnered some attention from investors. As of September 30, 2018, the company had 2,424 Chipotle restaurants throughout the United States and 37 international locations.  

Chipotle has a simple menu and organic product offerings that can be customized to consumers' tastes. It is also integrating some industry leading technology through ecommerce. Overall its shrewd marketing campaigns and alternative menu have created a very positive brand with high appeal among consumers.

On the top line, Chipotle has posted some impressive revenue growth. In the third quarter of 2018, Chipotle had nine-month revenue growth of 9% with comparable store growth of 3.3%. For the trailing twelve months (TTM) through November 2018, one-year revenue growth was 14.65% and three-year annualized revenue growth was 2.90%.

Not many restaurants have achieved such high growth rates. Major dining businesses, including McDonald's, Yum and Wendy's, showed negative growth through these timeframes. This attests to Chipotle's market share demand, strong brand equity and ability to generate consistent repeat sales.

Margins can be an important differential in the restaurant business with established companies reporting high margins and exemplary business efficiency. While Chipotle has been booming, its margins have lagged competitors and are a key area of focus for industry analysts. With a TTM gross margin of 18%, TTM operating margin of 7% and TTM net margin of 4%, it is last among some of its largest competitors. Some factors affecting this include its restaurant expansion and integrations of new technologies in its existing restaurants such as digital pick up.

While reporting the lowest margins across the industry, the company is also reporting some of the highest net income growth which means it has room for improvement that could potentially lead to further upside potential. For the TTM, CMG has operating income of $339 million with a one-year increase of over 300%. Its TTM net income is $334 million with a one-year growth rate of 668%. Earnings per share for the TTM were $6.72 for a one-year increase of 701%.

The management of capital with the integration of new capital projects is always a concern for senior management. New technologies and restaurant expansions are factors that will affect margins as well as investor returns in the near term. This can be seen in some of the valuation metrics for Chipotle. Chipotle has a five-year annualized return on assets of 13.01% and a five-year annualized return on equity of 17.12% - which are lower than most of its competitors. Chipotle has a price to earnings of 70 and a price to sales of 3.

CMG has been a top stock performer. For the TTM period through November 23 it leads its competitors with a gain of 68%.

Chipotle has a skillful management team with a lot of industry experience. In March 2018, it appointed Brian Niccol as its CEO. At the same time, Steve Ells, the company's founder became executive board chairman. Other members of senior management include Chris Brandt, Curt Garner and John Hartung

Chipotle has managed to exceed industry growth in revenue with a few key characteristics. It offers an alternative to many of the traditional names in the restaurant industry. It has also taken some large strides in implementing digital technology that allows customers to order online and pickup at the store which is an important growth factor as ecommerce sales increase across retail overall. Its capital initiatives have been successful and its outlook is generally positive helping its PE to remain high. It has faced some challenges in food quality and its margins remain low which will be factors to watch as it continues to expand.