Chipotle Mexican Grill - Essay Example

College: Chipotle Mexican Grill, Inc Executive Summary Chipotle Mexican Grill, Inc is a service provision sector that deals with Mexican food restaurants which operate in USA, Toronto and London. The products are fast casual as well as fresh foods. By the end of 2010, it had 1084 restaurants and it is headquartered in Denver Colorado. It is headed by Mr. M. Steven Ells, (Founder, Chairman and Co-CEO and Mr. Montgomery F. Moran Co-CEO and Secretary Key statistics of the company include: Currency in USD, except for ratios Market capitalization 7.75 B Profit margin (FYE 31.12.2010) 9.75% Operating margin (FYE 31.12.2010) 16.02% Return on equity (FYE 31.12.2010) 23.64% Revenue (FYE 31.12.2010) 1.84 B PEG ratio (5 years forecast) 1.85 Return on Assets 17.65% Price/sales (FYE 31.12.2010) 4.22 Quarterly revenue growth (YoY) 24.50% Net income (FYE 31.12.2010) 178.98M Earnings per share 5.64 The company boosts of high efficiency as captured by it governance risk indicators which makes the company have low risks in its board, audit and compensation and a medium risk in shareholders’ rights. With the high rate of quarterly revenue growth of 24.50% against 8.90% of the industry, the company has experienced a steady growth in its branch network. Moreover, it is among the top companies in terms of market capitalization with a ROE of 23.64%, which guarantees investors of a good return. For the company to enjoy high performance, it should restructure its employment policies to word off concerns by investors due to the audits concerning immigrant workers (Schriftenreihe & Buchholz , 2008). 2. Review of the company and its business Chipotle Mexican Grill, Inc is among the top service provision companies in the restaurant industry with a market capitalization of 7.75 B US dollars. It competes directly with companies such as Panda Restaurant Group, Inc, Taco Bell Corporation and Odoba Restaurant Corporation which are privately owned companies. Nevertheless, the company has indirect competitors such as Whitebread PLC, Mitchells & Butlers PLC and McDonald Corp whose market capitalization is higher. Over the years, this company has continued to spread its tentacles and has managed to establish a large network in US in 33 states. The expansion has made it find new ways of serving its large clientele through product innovations and appealing selling propositions Key product lines Chipotle Mexican Grill, Inc has a wide range of products made up of dishes and beverages. These include burritos, selected beer, salads, salsas, lettuce, tacos, fruit drinks, burrito bowls, cheese, margaritas, a variety of meat types and guacamole. These gives the company a leverage as the customers have a wide variety to choose from. The extensive branch network in the 33 states in United States which are augmented by other branches in UK and Canada makes the company and its subsidiary serve a wide geographical area. The company leverages its products by using natural ingredients which makes the products unique and appealing to many customers. This is manifested by the long queues especially during lunch times (Wylie, 2009). Strengths The competitive advantage over other business competitors is dependent on the goals and vision as well as mission thereof. The prudential guidelines make a company be able to offer quality products and efficient services to its customers. Moreover, a company gets the motivation to expand its network in a wide geographical area as its products and services get a high demand. The strengths of a company therefore, put a company in a good position to do business and be able to make profits even when others are counting losses. These key driving forces can be product innovations, strong financial postings, efficient and competent workforce, diversified business operations, competent management, conducive working environment as well as better terms of pay and compensation, and well thought and articulated financial and business operation policies. This is also boosted by establishment of clear guidelines that make foreign operations to be in tandem with host country (Hall, 2005) Chipotle Mexican Grill, Inc boosts of a number of strengths. It has had a strong financial performance over the last three years that has seen its revenue growth moving from US dollars 1.085B in 31st December 2007 to US dollars 1.835B in the fiscal year that ended on 31st December 2010. The profit margin as well as net income have also rose accordingly from as low as 70.56M dollars in 2007 to 178.98M dollars in 2010. The graph below shows how the company has performed since 2006 to 2010 in its revenues, profit margin and net income growth Fig 1: Company Performance: Source, Company website The company has also realized a good performance in its total assets growth from US $722.12 M in 2007 to US $1.122 B in 2010 which is an indication of the good use of its prudential financial policies and utilization of the funds. It should be noted that, continuous growth in the assets base requires a clear and broad based strategic plans which are promotes prudent use of the investment funds to realize profits and bring forth a good returns due to efficient use of assets. The company has managed to limit its liabilities and debt capital and instead has grown its equity which has rose from US $562.11 M in 2007 to US $810.87 M in 2010. Moreover, the company has a high return on equity of 23.64% and return on assets of 17.65%. These returns on the investments are attractive since for every dollar invested in equity, a return of 23.64% is realized. The graph below shows the performance. Fig 2: Balance Sheet ,from Company website In addition, the investors are able to get US $5.64 as earnings per share. This has been boosted by the business performance and the good prospects of share growth for instance its share price to sales is 4.22 compared to 2.03 of the restaurant industry. This indicates that its share price has a chance of growing by 4.22 times. The company predicts the share to reach a high of US $268.32 by the end of the financial 31st December 2011. The share closed at US $249.67 on 8th March 2011. The performance of the revenue growth from year over year by 24.50% on a quarterly basis also gives Chipotle Company a good footing as the revenues provide it with enough working capital. This makes it able to meet its current obligations with ease. Company Ratios and Performance at Stock Exchange Performance The following were the company’s ratios in relation to industry comparison at 31st December 2010 Profitability - CHIPOTLE MEXICAN GRILL INC (CMG) Return on Assets 17.65% Return on Equity 23.64% Return on Capital 24.16% Margin Analysis - CHIPOTLE MEXICAN GRILL INC (CMG) Gross Margin 37.71% Levered Free Cash Flow Margin 7.16% EBITDA Margin19.77% SG&A Margin 8.11% Asset Turnover - CHIPOTLE MEXICAN GRILL INC (CMG) Total Assets Turnover 1.8x Accounts Receivables Turnover 352.4x Fixed Assets Turnover 2.8x Inventory Turnover 179.9x Credit Ratios - CHIPOTLE MEXICAN GRILL INC (CMG) Current Ratio 3.3x Quick Ratio 3.1x Long-Term Solvency - CHIPOTLE MEXICAN GRILL INC (CMG) Total Debt/Equity 0.5x Total Liabilities/Total Assets 27.7x Growth Over Prior Year - CHIPOTLE MEXICAN GRILL INC (CMG) Total Revenue 20.91% Tangible Book Value 15.76% EBITDA 33.98% Gross Profit 25.17% Receivables18.79% Inventory 26.43% Diluted EPS Before Extra 42.78% Capital Expenditures -3.40% Cash From Ops. 10.94% Levered Free Cash Flow 37.86% Retrieved from Bloomberg Business Week (2010) According to the company’s financial ratios, the company performed well in the year 2010. Chipotle Co. had impressive figure in its profitability rations, for example the return on capital indicated a 24.6 %, return on equity 23.64 %and return on assets 17.65%. This is a clear indication that the company is on the right track in regard to growth and forecast. The positive return on capital and equity is will motivate the investors to pump in more recourse for the company’s expansion and growth. In addition, the liquidity rations illustrate the company has a strong liquidity position and is in a position to settle financial obligations with ease. In addition, the company will have enough liquid to boost its working capital. On the other side, investors would argue that solid liquidity implies that he company has is keeping cash rather than investing it. In 2010, the company’s. Gross margin ration was 37.71%, EBTDA at 19. 77% and Leverage free cash flow at 7.16%. Almost all the ratio in 2010, indicated positive performance apart from the capital expenditure which reported a -3.40%, this figure implies that the company used in excess the capital reserves and such a trend would imply poor investment decisions for the company. Company’s SEC filing since 2008 to 2010 2008 Report Source: Bloomberg 2009 Report Source: Bloomberg 2010 Report Source: Bloomberg From the above filling, it is clear that the company has recently filed less information with SEC and thus it has denied a substantial amount of information of from the public. To successfully publish and plan for its investment options, the company should change the trend that it had adopted late last year and file with SEC on a regular basis. Strategic competitive advantages: The diversified business operations in USA, UK and Canada alongside the wide range of products and services, serve as key growth component of the company. The losses incurred by one or more subsidiaries are set off by the profits made in other subsidiaries thus buoying the company from financial loss shocks. On the other hand, the able and competent management which assisted the company to achieve such tremendous growths is another significant factor. As the management implements the various policy measures such automating its services and adopting product differentiations as well as using clean energy in its operations, the company will be able to even win the assistance of host governments. This is premised on the fact that many governments are looking for ways through which carbon emissions can be reduced in order to curtail air pollution (Hall,2005). Another competitive advantage that Chipotle has over its competitors is the pricing system, its pricing s inexpensive despite the fact that there food is very expensive for example it charges $5 for their enormous 11/4 pound burrito. It has a differential advantage due to their ability to deliver Mexican cuisine inexpensively and fast. This has been made possible by the fresh ingredients and simple menu. More over it operates with fun and cool atmosphere but with the speed of a fast food eatery “Chipotle has differentiated itself from its competitors .It has the speed of a fast food restaurant as well as the low cost” (Wylie, 2009. p 5). However, the company has to streamline its employment policies as it has been accused of illogically recruiting immigrant workers. The recent audits of company concerning the immigrant workers has been viewed as contravention of US laws and in case the menace is not corrected, the operations of the company may be negatively affected. Furthermore, the management ought to increase efficiency to reduce queuing that has in the recent past led to dissatisfaction by a number of customers who opted to leave due to delays in having their orders attended to. The elements that could impact valuation of the company include recruitment policies, green energy adoption in its operations. However, the employment issue may work against the company if charges are leveled against it and these could be the contingent liabilities in case the cases are not determined immediately. 3. Economic Forecast Just like any other company, Chipotle has prospects of venturing into new markets, currently based in most parts of the United States of America, Canada and Mexico, the company has prospects of moving to the Asian Market. Chipotle Mexican Grill continues to venture into new markets, the last one being a restaurant in London in May last year; it plans to open the second one in Paris. Opening the business Paris will give the company a competitive advantage since most of the residents in this place understand and appreciate the value that Chipotle stand for” food with integrity” and clean and natural meat products. People in the European market are more concerned with where there food is sourced compared to the Americans, this will give the business an added advantage to widen its market base or customers. The macro economic market in the European market will offer plenty of advantages to the food company .So far the business environment that has been experienced in London is great and more sites are will still be coming up (Brigham,2008) . In terms of sourcing, there is a bigger supply of naturally raised foods in Europe; this will make the company sourcing process easy and cheaper. In the long run, the company believes that the European market share will be as big as that of the US market. "The European business could be as big as the U.S. over time," he said, "but it will take several years before it has a meaningful impact on earnings." Said Stifel Nicolaus. On the same note Miller Tabak, the company’s analyst says that he expects Chipotle to only get “modest contribution” from its businesses in the oversees market. The estimated number of eateries in the London, Paris and Munich could be 120 by the end of the decade .For the foreseeable future, Chipotle still expects to gain majority of its growth in the US, where it runs up to 1,110 eateries with significance opportunity for continued growth. Chipotle has plans to open 135 to 145 eateries during the year. Chipotle Fourth Quarter profit increased by 48 % and this saw its share raise to $1.47 as at 10th February, 2011. During the same period the company’s sales went up by 25 % to $ 482.5 million, this increase was mostly attributed to the customer traffic .Chipotle also plans to extend its business to the Asian market where it will put more focus on better quality ingredients that will be gotten from sustainable sources. Given that the Asian market is not receptive to fast food restaurant ,the company hopes to capture that market niche and this plan according to Darren Tristano, executive vice president of Technomic ,a consultancy firm ,Asia may be a second leg to the US market. The following table indicates the company stock forecast as listed on the NYSE 1. March 2011 Call Last Trade Last Change High Low Volume Open Interest Strike Price Put Last Trade Last Change High Low Volume Open Interest CMG 11C19 220.000 1 Days ago 40.30 +8.07 43.90 36.30 30 1,046 220.00 CMG 11O19 220.000 1 Days ago 0.05 -0.08 0.20 0.02 374 3,078 CMG 11C19 230.000 1 Days ago 30.60 +3.20 33.87 27.20 43 1,507 230.00 CMG 11O19 230.000 1 Days ago 0.20 0.00 0.28 0.10 572 3,846 CMG 11C19 240.000 1 Days ago 19.00 -0.20 24.00 17.00 117 2,074 240.00 CMG 11O19 240.000 1 Days ago 0.40 -0.10 0.43 0.20 641 3,549 CMG 11C19 250.000 1 Days ago 9.70 -0.70 14.40 8.00 349 1,854 250.00 CMG 11O19 250.000 1 Days ago 1.30 -0.05 1.73 0.60 1,392 2,623 Last 258.22 CMG 11C19 260.000 1 Days ago 3.40 -0.10 6.20 1.95 1,187 4,125 260.00 CMG 11O19 260.000 1 Days ago 4.80 -0.21 6.10 2.20 645 1,186 CMG 11C19 270.000 1 Days ago 0.55 -0.15 1.30 0.45 1,201 3,497 270.00 CMG 11O19 270.000 1 Days ago 12.50 +0.90 13.80 7.50 392 1,290 CMG 11C19 280.000 1 Days ago 0.10 -0.05 0.20 0.05 271 2,081 280.00 CMG 11O19 280.000 1 Days ago 20.00 -1.70 21.40 16.60 222 421.00 CMG 11C19 290.000 1 Days ago 0.01 -0.04 0.04 0.01 6 1,064 290.00 CMG 11O19 290.000 1 Days ago 34.19 -9.21 34.19 34.19 1 66.00 (Retrieved from Bloomberg,2011.) 2. Jan 2012 Call Last Trade Last Change High Low Volume Open Interest Strike Price Put Last Trade Last Change High Low Volume Open Interest CMG 12A21 220.000 1 Days ago 62.50 +2.70 62.50 62.50 20 270.00 220.00 CMG 12M21 220.000 7 Days ago 23.60 0.00 -- -- 0 2,340 CMG 12A21 230.000 1 Days ago 54.00 +1.42 54.00 54.00 8 236.00 230.00 CMG 12M21 230.000 1 Days ago 26.15 -1.55 26.35 26.10 20 117.00 CMG 12A21 240.000 1 Days ago 47.52 -2.38 50.00 47.52 13 352.00 240.00 CMG 12M21 240.000 1 Days ago 30.00 -1.00 30.00 30.00 20 253.00 CMG 12A21 250.000 3 Days ago 41.40 0.00 -- -- 0 538.00 250.00 CMG 12M21 250.000 1 Days ago 32.70 -4.30 33.00 32.70 4 96.00 Last 258.22 CMG 12A21 260.000 1 Days ago 40.20 +9.90 40.20 38.20 15 105.00 260.00 CMG 12M21 260.000 1 Days ago 39.00 -2.90 39.00 38.50 14 45.00 CMG 12A21 270.000 1 Days ago 36.50 +3.10 36.50 36.50 2 100.00 270.00 CMG 12M21 270.000 21 Days ago 49.00 0.00 -- -- 0 278.00 CMG 12A21 280.000 17 Days ago 21.90 0.00 -- -- 0 105.00 280.00 CMG 12M21 280.000 4 Days ago 52.50 0.00 -- -- 0 51.00 CMG 12A21 290.000 1 Days ago 25.96 +3.96 25.96 25.96 1 84.00 290.00 CMG 12M21 290.000 11 Days ago 60.00 0.00 -- -- 0 11.00 (Retrieved from Bloomberg 2011) 3. March 2013 Call Last Trade Last Change High Low Volume Open Interest Strike Price Put Last Trade Last Change High Low Volume Open Interest CMG 11C19 220.000 1 Days ago 40.30 +8.07 43.90 36.30 30 1,046 220.00 CMG 11O19 220.000 1 Days ago 0.05 -0.08 0.20 0.02 374 3,078 CMG 11C19 230.000 1 Days ago 30.60 +3.20 33.87 27.20 43 1,507 230.00 CMG 11O19 230.000 1 Days ago 0.20 0.00 0.28 0.10 572 3,846 CMG 11C19 240.000 1 Days ago 19.00 -0.20 24.00 17.00 117 2,074 240.00 CMG 11O19 240.000 1 Days ago 0.40 -0.10 0.43 0.20 641 3,549 CMG 11C19 250.000 1 Days ago 9.70 -0.70 14.40 8.00 349 1,854 250.00 CMG 11O19 250.000 1 Days ago 1.30 -0.05 1.73 0.60 1,392 2,623 Last 258.22 CMG 11C19 260.000 1 Days ago 3.40 -0.10 6.20 1.95 1,187 4,125 260.00 CMG 11O19 260.000 1 Days ago 4.80 -0.21 6.10 2.20 645 1,186 CMG 11C19 270.000 1 Days ago 0.55 -0.15 1.30 0.45 1,201 3,497 270.00 CMG 11O19 270.000 1 Days ago 12.50 +0.90 13.80 7.50 392 1,290 CMG 11C19 280.000 1 Days ago 0.10 -0.05 0.20 0.05 271 2,081 280.00 CMG 11O19 280.000 1 Days ago 20.00 -1.70 21.40 16.60 222 421.00 CMG 11C19 290.000 1 Days ago 0.01 -0.04 0.04 0.01 6 1,064 290.00 CMG 11O19 290.000 1 Days ago 34.19 -9.21 34.19 34.19 1 66.00 (Retrieved form Bloomberg, 2011) The above analysis indicates an upward trend in the company shares and thus an increase in its earnings. This is a clear indication that the company growth is likely to be experience d in the coming years. Works Cited Bloomberg Website. Chipotle Company Analysis Accessed on 14th March 2011 from http://investing.businessweek.com/research/stocks/options/options.asp?type=T&view=N&expiration=1_2012 Brigham, E. F and Houston, J. F. “Fundamentals of financial management”, ( 6th ed), OH: Cengage Learning, 2008. Chipotle Company. “Prospectus 7,878,788 Shares”Accessed on 27th Jan 2011 from http://www.morganstanleyindividual.com/Markets/IPOCenter/Prospectus/?DocID=p_CHIPO Ehrhardt, M. C. and Brigham ,E. F. “Corporate Finance: A Focused,” Edition3, Cengage Learning, Ohio, 2009. Graham J R and Harvey C R, The theory and practice of corporate finance: evidence from the field, Journal of Financial Economics Vol. 60, issue 2-3 Pg 187-243, Fuqua School of Business, Duke University, Durham, NC,2001. Hall, Linda .”Brands and their companies: consumer products and their manufacturers with addresses and phone numbers,”( Vol 1),London: Thomson Gale, 2005. Joshua ,R and Pearl, J. “Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions” NJ: Hoboken, 2009. Much ,Marilyne ,Investor business Daily . “Chipotle Top Up Overseas Present, Test Asian Eateries” posted n 03/02/2011 Accessed from http://www.investors.com/NewsAndAnalysis/Article/564681/201103021429/Mexican-Food-Chain-Sets-Its-Sights-On-London-And-Paris.aspx Schriftenreihe, Akademische and Buchholz ,Sabine. “When a Brand Gets Wings: Red Bull's Secret of Marketing Success” GRIN Verlag, 2008 Wylie ,Kimberly. “Marketing Analysis Chipotle Mexican Restaurant and Applebee's Restaurant” .New York: GRIN Verlag, 2009 Read More