Sometimes, the next Chipotle is, well, Chipotle. Or the next Microsoft is, Microsoft. I know we’ve spent a lot of time here looking at future BRKs, but sometimes, the next X is just X.
This blog started in the fall of 2011, I think, so let’s just look at some of the Berkalikes and how they’ve done since then. I used December 31, 2011 as the start point; this is the first date I chose so didn’t cherry-pick. And check it out, the only one who has been outperforming the S&P 500 total return index since then is BRK! It turns out you would have been better off just owning BRK instead of switching over to something smaller and presumably much more nimble. (FRFHF and L had some dividends, but probably won’t affect this chart all that much).
The Next Chipotle
Anyway, I am not a restaurant specialist or anything, but I do love following restaurants, and I have done well with CMG. I have owned it for a long time, and I am also a sucker for anything fast casual. I love checking out new restaurants in that category, and of course, if there is a stock listing of a fast casual shop, of course I will look at it. My kid used to bug me about Sweetgreen (SG) all the time as he used to have it for lunch just about every day. But as much as I try to justify high prices here, I usually don’t do money losing businesses, unless there is a clear path to profitability (I only bought AMZN after AWS).
I remember a while back, people were talking about Noodles and Co. (NDLS) as the next CMG, and there was a little bit of a connection there; I think some former CMG employees went over to run it. Of course, first chance I got, I went to one and tried it out. But in this case, it was obvious this was not going to work. I liked it, and it was OK. But the menu was sort of scattershot and didn’t really strike me as interesting. But the worst of it was the model.
As much as they wanted to make it feel like the next CMG, here was the problem. You go to the counter and you order your food. Then, you have to go sit down and wait for your food. I was stunned when I looked behind the counter that they only put the pasta into the pot after you made your order, which means that you are going to have to wait at least 5-8 minutes until the pasta is done, and then you get your food. OK, so with some types of ‘fresh’ pasta, I suppose you can cut that down to 1-3 minutes. But still, I knew right away they are not going to get anywhere near the unit economics of CMG doing that. Remember, the key to CMG’s unit economics is throughput. They can get so many people through the line so fast that it was amazing to watch during their peak years (I assume they are back to peak performance again lately). Well, Five Guys and Shake Shack are similar in that regard, you have to wait for your food, but it seems to work for them (even though I have no idea about the economics of Five Guys, other than that it’s mostly franchised).
CMG never made the best burritos. I know some local places that make way better burritos, but the problem is, you go to the counter and order your food, only then does the guy behind the counter put your meat on the grill. Well, that’s why it’s going to be better, but it’s going to be slow. And they are not going to go through a line as fast as CMG can.
Now, with NDLS, you had a scattershot, unfocused menu where you didn’t know what to make of it, and then you had this really slow process. I guess when you try to please everyone with a menu, you end up pleasing nobody. I also remember the really complicated menu at Qdoba a while back.
Needless to say, in this case, you were better off just buying CMG instead of the “next CMG”. Anyway, I don’t mean to suggest I can go into one restaurant in a chain and be able to tell you if it’s going to work or not, but this was not that hard a call.
CMG vs. NDLS since NDLS IPO
OK, so where is this going? I happened to come across CAVA only recently, and the food was really good. The service was not so great as it was really slow and people had to keep going back into the kitchen to get things. I think that might be because they just opened and it was not during a busy time. But the food was good, and I had no idea that an IPO was imminent for the company. When I saw that they did an IPO the other day, I was very excited. This is certainly a name that if you were a big institutional investor, you would have definitely asked for a piece of it (so you can at least flip it on the first day… which, actually, you may not be allowed to do; if you did, you won’t get the next hot IPO).
Of course, IPOs are not usually places anyone would go to look for value, and I don’t usually read a lot of S1s, unless it’s in a sector / industry that interests me. Then I would read it as there is often a lot of useful information in them even if you are not interested in the offering.
Anyway, the normal way to value these things is to just look at how many stores you think they will be able to grow into, figure out their margins, eps, slap a P/E ratio on it and then discount it back to now. I will leave that to analysts to do, but here, I will just make one simple observation.
First, since people keep saying this or that is the next CMG, let’s just look at the whole history (or most of it) of CMG and see how it has grown and evolved over time.
Chipotle Historical Data
|Revs||G&A||Op inc||net||EPS||# rest||Stock price||market cap||op mgn||p/s||p/e||fwd p/e|
The important thing to note here is that CMG didn’t get solidly profitable until they had over 400 restaurants. CAVA only has 263 at the end of the 1Q, and SG has 186. So expecting them to be profitable soon might be asking a lot. All restaurants are different, so maybe this is not correct, but looking at this, that’s what I would conclude. A company as well-managed as CMG was able to turn a profit only at around 400 restaurants. And then look at the trend in the market cap. SG has a market cap of $1.7 billion and CAVA is at $4.6 billion after doubling their IPO price on the first day. This is very rough as I am only looking at year-end prices, but CMG didn’t get to a $2 billion market cap until it had 700 restaurants. You can look at the table to see where CMG was at these various market caps.
Show Me the Money!
But one thing that strikes me from looking at this CMG table is that it is OK to wait for profitability before investing. CMG didn’t turn profitable until 2004, and they had their IPO in January 2006. Even if you didn’t get the IPO price and you bought in at the end of 2006, you would have bought in at $57 and would be sitting on a nice return. At the end of 2006, CMG was profitable for a full 3 years. Maybe this just means SG and CAVA IPO’ed too early, I don’t know. But this is what I would look at. How will they perform getting up to and past 400 stores etc. CAVA seems like they are doing well as their restaurant level margins are up to 25% while SG is not doing so well on that metric. Of course, like many others, I look at SG and think, well, it’s just salad. But people said CMG was just a burrito and SBUX is just coffee, so I am careful about making statements like that, of course.
But I’ll let them prove to me that there is something there, and there is absolutely no rush. It is OK to wait for these things to turn profitable, and even wait for them to get on a solid track before touching the stock.
One other thing about CAVA is that I don’t know why Zoe’s didn’t succeed (OK, I just Googled a little bit and it seems like they made a lot of mistakes, debt-funded too-fast growth etc). It was listed so the SEC filings should still be there, so maybe I will have to browse through those filings to figure out why that didn’t work. I remember when that came out, the concept was exciting to me, but there were no restaurants near me for me to check out, so I couldn’t touch it or do anything with it.
Also, we have to keep in mind that during these early years at CMG, they were pioneers in this concept, so they had it all to themselves. Now, if you walk down the street, there are so many decent-looking fast casual concepts opening (and closing) all the time, and fancy, upscale food courts everywhere. So the space between cheap fast food and sit-down restaurants is filling up pretty quickly, which will make it harder for the likes of SG and CAVA for sure, compared to CMG.
Anyway, this isn’t really much of a post for a value investing blog, but we all have some stuff in our portfolio that really don’t fit the conventional value mould so I will write about them sometimes (I don’t, but I bet some of you own bitcoin but would never admit it!).