When Chipotle reports earnings July 21, everyone will be watching.
For the past decade, Chipotle’s growth has been unstoppable.
But shares have fallen 9% since reaching an all-time high in January.
Many investors fear the burrito chain’s $US21 billion valuation might be too high and that it is nearing saturation. Chipotle has also raised prices, citing commodity costs, at a time when consumers are concerned about value.
Chipotle’s traffic comparisons, expansion plans, and profit growth — which the company will report in a few days — determine whether the shares will go back to an upward trajectory.
Ken Kurson at Esquire makes a compelling case for why Chipotle’s growth is unsustainable.
“Next time you’re in a Chipotle, look past the attractive design and friendly employees,” Kurson writes. “Would you buy that location (which almost certainly doesn’t even own its real estate) for $US12 million?”
Two key ingredients, beef and avocados, have proved especially costly. At the same time, the jobs market is recovering and fast food workers are striking for better benefits and pay. If business costs continue to rise, Chipotle’s profits will suffer.
Chipotle’s success is largely dependent on its “food with integrity” values, according to Kurson. So far, customers have been willing to shell out more for burritos that are higher-quality than many fast food competitors.
But as Chipotle expands, it runs the risk that new customers won’t be as perceptive.
“Will customers at airports and military bases and mall food courts — all cited as growth areas by the company — care as much about food with integrity?” Kurson asks.
Chipotle has 1,600 locations, with plans for more expansion.
Kurson argues that in order to live up to its high share value, the company would have to open considerably more locations. This could result in cannibalization — visitors stop frequenting one Chipotle in order to go to a closer one. The company could also have trouble finding customers willing to shell out for its burritos.
Kurson reassures readers not to think that Chipotle is in trouble or going out of business.
“Bottom line: This is a great company with great food and a bright future,” he writes. “But the stock is way ahead of itself.”
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