While analysts are busy raising estimates ahead of Chipotle’s earnings results next week, the burrito chain is setting its sights outside the US with its first franchised restaurants.
Chipotle Mexican Grill CMG –0.65% (ticker: CMG) announced Tuesday it will open its first locations in Kuwait and Dubai next year, via a partnership with franchise group Alshaya Group. The firm already operates other US eateries abroad, including Starbucks (SBUX) and Shake Shack (SHAK), as well as retailers such as American Eagle Outfitters (AEO).
According to AFP, Chipotle already has a small presence abroad in Canada and Europe, but the vast majority of its locations are domestic.
“Chipotle is ripe for international franchise expansion given a simple operating model,” writes TD Cowen analyst Andrew Charles, of Tuesday’s announcement. “This bodes better for valuation as it opens the door for future asset-light development opportunities that can help the brand expand faster than through company-operated openings.”
Owning its own restaurants, as Chipotle has to this point, allows a company a degree of crucial control over its brand and business. However, once established, many restaurants embrace some form a franchise model, in which it licenses third parties to use its model and menu, given that it is a way to generate a steady stream of royalties without capital-intensive investment. The vast majority of McDonald’s (MCD) restaurants, for example, are franchised.
“While it will take time (many years) to contribute to the company’s bottom line, we believe international franchise expansion could play an important role in the company’s long-term unit growth potential,” notes Raymond James analyst Brian Vaccaro, even as Chipotle’s growing US footprint will remain the primary driver of shareholder returns for the foreseeable future.
Wells Fargo analyst Zachary Fadem raised his price target to $2,400 from $2,050 on the news. His back-of-the-envelope math has every 100 franchised stores representing the prospect of $15 million in annualized revenue, or 36 cents in earnings per share. That may be small potatoes compared with last year’s earnings per share of nearly $33, but Chipotle’s international expansion is a massive opportunity, he argues, one of the largest in its category.
Still, Chipotle’s domestic business is more than enough to make most analysts optimistic—70% of those tracked by FactSet have a Buy rating or the equivalent on the shares, and earnings per share estimates for the second quarter have been steadily rising over the past three months. Current consensus calls for Chipotle to deliver earnings per share of $12.28 on revenue of $2.53 billion when it reports on July 26.
Late Monday, Truist analyst Jake Bartlett raised his same-store sales growth estimate for the second quarter to 7%—although that is below the 7.5% average analyst estimate—and his price target to $2,310, from $2,270, as he maintained a Buy rating on the shares.
Likewise on Monday, Gordon Haskett analyst Jeff Farmer modeled for the company to report same-store sales growth of 8% for the quarter, writing Chipotle is in a league of its own, in terms of growth, digital penetration, and margin expansion.
Chief Executive Brian Niccol was named as one of Barron’s Best CEOs last month. The shares, which have gained more than 54% this year, were up 0.7% Tuesday to $2,143. 83.
