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Finding the "Next Chipotle."



August 22, 2014 – Comments (4) | RELATED TICKERS: LOCO , PBPB , NDLS

There's been a little cliche floating around investor circles for some time now: "(insert restaurant company name) IPO/stock is the next Chipotle!" Frankly this cliche annoys the living daylights out of me for a couple of reasons. 

#1: The company may not be related.

Oftentimes when this cliche is eagerly breathed by hopeful investors in a hot new restaurant stock, they aren't even considering the idea that the stock in question is in no way related to Chipotle's style or is even in the fast-casual sector. For example, take El Pollo Loco (NASDAQ:LOCO), a stock I hold a firm redthumb on in CAPS. Inherently, El Pollo Loco is not a fast-casual brand - it's just got the "fast" part of the equation. Like McDonald's or Burger King, El Pollo Loco is a fast food chain, but with a Mexican food slant, like Taco Bell. While there may be some room for growth for El Pollo Loco, the current valuation is quite rosy for a company in the midst of the "next Chipotle" feeding frenzy.

#2: The phrase encourages a "buy before you look" mentality.

About ten months ago, I was keeping track of two upcoming IPOs to potentially invest in: RE/MAX and Potbelly (NASDAQ:PBPB). Admittedly I was interested in Potbelly due to the "next Chipotle" talk as well as the seemingly good growth numbers. But after researching and mulling it over, I bought shares of RE/MAX instead of Potbelly. Check out the stock charts from their IPO dates to now, and you'll see that if you bought RE/MAX instead of Potbelly, you'd have a strong dividend-paying stock with solid growth and share appreciation. Potbelly, on the other hand, has declined precipitously from its IPO price, as investors sent the stock soaring to around $30 a share. The stock sits at $12 now. 

What is my point in this little example? Cliches like "the next Chipotle" encourage prospective investors to leap before they look into a company's fundamental valuation and business prospects. I'm certainly not saying everyone who purchased Potbelly shares held this mentality or did not do their homework; I'm sure some people bought RE/MAX without research and Potbelly with hours of research. The takeaway is that cliches like "the next Chipotle" can be deceiving and dangerous if you don't do your due diligence.

#3:  Actual numbers tell the real story.

Theoretically, one could slap the label "the next Chipotle" on any new hyped restaurant stock without considering what makes Chipotle so uniquely special. Chipotle has found a niche market and has exploited it extraordinarily well. Management is wise and keeps costs under control, juicing margins and making Chipotle flush in cash. Seriously, what other restaurant has been able to post double-digit growth in same-store sales quarter after quarter after quarter, and also continue to have some of the highest margins in the industry?  

Enter Noodles and Company (NASDAQ:NDLS), yet another firm hyped to be the next Chipotle. The margins and growth over at Noodles cannot even compare to Chipotle. Noodles' margins are quite low, and the same-store sales are only in the middle single digits. The stock has been rather volatile and lately has performed quite dismally. The actual numbers and cold, hard facts paint the real picture, not an artificial, superficial label.

Overall, while any of the three companies mentioned may indeed provide attractive investment opportunities in the future, it seems the "next Chipotle" hype does more harm than good. Rather than following the crowd and excitedly buying shares based on the hype, look deep into a restaurant stock's financials and performace to see if there is shareholder value to be unlocked.

4 Comments – Post Your Own

#1) On August 25, 2014 at 10:15 AM, griderX (97.51) wrote:

Well said...I also have red thumbs on LOCO, PBPB & NDLS.  As a general rule of thumb (I would wager) if anyone says X-IPO company is the next Chipotle (or you can replace Chipotle with any world class company AAPL, GOOG, MSFT, INTC. etc.) stay away because valuations in general will be VERY rosy at IPO time.

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#2) On September 20, 2014 at 12:30 PM, MKArch (99.82) wrote:


I took a small flier on NDLS some where between it's IPO glory days and current lows as well as a green thumb in CAPS. I remember when I was doing some investigation into NDLS I researched Chipotle's number when they had a similar number of stores to compare to NDLS. I don't remember every detail but in general Chipotle was not real profitable then. I think revenues were higher than NDLS but expenses were also a lot higher and I think margins worked out about the same. I remember thinking that it seemed NDLS had an advantage in the cost of their ingredients that offset lower revenues.  

 I have no formal financial or accounting background so I could be missing something however it seems to me the criticism and comparisons between NDLS and CMG are based on CMG current financials and not their financials when they were a similar size to NDLS. Are you basing your criticism of the NDLS-CMG comps on CMG's current margins or when they were about the same size as NDLS? I know NDLS has hit a growth road block in recent quarters but did CMG grow uninterupted?

 I think NDLS had around 400 stores when I started looking at them and I went back through CMG's filings to get statement when they had about 400 stores. If I remember right it was about 8 years back for CMG so I tried to extrapolate similar growth over something like 10 years for NDLS while also dialing back some performance as well. Finally I ballparked NDLS would get much more pedestrian multiples at the end of this growth. If I remember right I ballparked something like 20X-30X. When I discounted this back to present value I think I came up with a price in the $40 or about where NDLS traded before growth slowed and the stock imploded.

As I stated I have no formal accounting background so I could be missing something however I wonder if your crticism of NDLS isn't the opposite side of the coin where because NDLS current performance doesn't compare to CMG's current performance you write NDLS off to easily? 

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#3) On November 03, 2014 at 11:24 AM, EvanBuck (99.93) wrote:

MKArch, you do bring up some good points, as I'm comparing Noodles to Chipotle's current numbers. While Noodles may be a good stock in the future based off of your analysis, the primary focus of my article is not to tear down El Pollo Loco or Noodles but to help investors focus on a company's merits independent of cliches like "the next Chipotle."

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#4) On November 07, 2014 at 12:08 PM, MKArch (99.82) wrote:

I've got you Evan and that's what I thought your article was about. I was just playing devils advocate point out that a restaurant chain doesn't have to be the next Chipotle to be a "potential" good investment (if you get in at the right price).

I haven't had a chance to really look at the latest from NDLS but it looks like they have a nice run lately based on just bottoming out. I'm not ready to run any victory laps as I realize one quarter of bottoming out does not a turn around make, however the market is suggesting there's likely big upside just getting back to O.K. results. If somehow they did manage to be the next Chipotle all the better.

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