I'm LongbridgeAI, I can summarize articles.Chipotle Mexican Grill's stock surged nearly 800% under CEO Brian Niccol, who resigned to lead Starbucks. The company, with over 3,700 company-owned locations, boasts a high restaurant-level operating margin of nearly 27% in 2024. Chipotle aims for 7,000 locations and $4 million in average sales per restaurant. However, profit margins may decline due to inflation and consumer pushback, potentially leading to slower operating income growth. By 2029, projected revenue could reach $19 billion, but operating income may only rise by 40%, raising concerns about outperforming the S&P 500.
Brian Niccol was the CEO of Chipotle Mexican Grill (CMG -1.99%) from March 2018 through August 2024. And during his tenure, Chipotle stock was up nearly 800%. Having led such a performance for shareholders, investors were understandably rattled when Niccol abruptly resigned to take the CEO position at Starbucks.
The dust from the leadership shakeup has finally settled for Chipotle stock, which makes now an ideal time to give the company a fresh look. In this article, I'll attempt to forecast what could happen with the business over the next five years and consider whether it's a worthy investment in light of its potential.
Why Chipotle has been a great stock
Chipotle stock has rewarded shareholders over the long term in large part due to its incredible growth. Unlike many restaurant growth stocks, the company doesn't use a franchise business model. Rather, all of its more than 3,700 locations are company-owned, meaning it keeps 100% of restaurant profits instead of just franchise fees and royalties.
It's extraordinarily difficult to run a restaurant chain of this scale -- Chipotle has had to systematically invest in leadership to oversee its rapid expansion. But it's objectively done well. Its restaurant-level operating margin (which excludes corporate expenses) was nearly 27% in 2024, up sharply from where it was just a few years ago and among the very best of its peers.
Chipotle's operating margin is so high, in part, because a single restaurant location is capable of handling an incredible amount of sales volume. On average, Chipotle's restaurants did $3.2 million in sales volume in 2024. The company constantly invests in systems and processes to push this number higher.
Also in 2024, Chipotle opened more than 300 new restaurants and expects to open 345 more in 2025. This incessant drive to open new, high-volume restaurants continues pushing revenue higher, which pushes profits higher, and results in a higher stock price.
As the chart below shows, Chipotle's stock price has largely followed its operating income higher over the last five years.
CMG data by YCharts
Chipotle's five-year potential
When it comes to top-line growth over the next five years, Chipotle will almost certainly deliver, in my opinion. The company is targeting 7,000 locations long-term and is hoping to get average sales up to $4 million per location annually. It won't reach these targets within five years. But management believes there's plenty of runway ahead and will navigate the business accordingly.
When it comes to bottom-line growth, things get a little more complicated. Consider that in 2018, Chipotle's restaurant-level operating margin was just 18.7%. Since then, the company has undergone many price increases and management said this was to account for inflation, which is partly true. But its restaurant-level operating margin was starting to approach 30%, showing that the price increases also padded the bottom line.
I don't necessarily fault Chipotle -- strong consumer demand often deserves enviable profit margins. But some negative press has resulted in consumer pushback. Now the company is adjusting portion sizes to compensate. But this has resulted in two consecutive quarters of declines for its restaurant-level operating margin.
Chipotle's management is implementing multiple things to make restaurant operations more efficient. But these will mostly offset ongoing inflation in areas such as food and labor.
In other words, it's possible that Chipotle's revenue will grow faster than profits over the next few years, due to its profit margins coming down.
In 2024, Chipotle generated revenue of $11.3 billion. Let's say that in 2029, the company generates revenue of $19 billion. This would reflect 10% annual growth in new restaurants and modest annual same-store-sales growth.
The overall operating margin for Chipotle was 17% in 2024. Let's say that it slips to 15% by 2029 -- that would still be among the very best in the restaurant space. In this scenario, the company's operating income would only be up about 40% over the next five years.
If Chipotle grows its operating income by 40% over that five-year period, I don't necessarily think it will lose money for investors. But it might not be enough growth for the stock to beat the performance of the S&P 500, either.
For this reason, I would say that someone who buys Chipotle stock today is betting that its operating margin continues to improve over the next five years, in spite of the headwinds. Personally, Chipotle's margins are already so good that I wouldn't bet that they'll further improve, especially with the challenges it now faces. But I can appreciate investors who feel differently.
Moreover, my growth assumptions for Chipotle could be too low, in which case the stock would have a greater chance at outperforming. And for what it's worth, many investors have underestimated Chipotle's growth potential, which is something to keep in mind when looking ahead.