One of the beauties of Jimmy's Hot Dogs in Easton, PA, is that the menu is about as limited as it can possibly be. Hot dogs, with pickles, onions and mustard; you choose. It's been around since the early 1900s, and my grandfather helped the original owner pull his hot dog cart up the hills of Easton near Lafayette College. They're the best hot dogs I've ever had, and they taste the same now as they did when I had my first one, 47 years ago. The beauty here, is in the simplicity of the menu.
Chipotle (CMG) is similar. While the menu is not quite as limited as Jimmy's, it is much simpler than that of many other chains. That has helped keep the margins high. Too many ingredients, and too many menu choices can be disastrous if not managed properly. It's one of the reasons that casual dining chain Cosi (COSI) has never turned an operating profit. It's not because the food is bad -- the menu has been too complicated. Too many ingredients leads to higher costs, more spoilage and higher labor costs.
Chipotle has in some ways been the Southwest Airlines (LUV) of the restaurant industry. One of the reasons Southwest has been one of the few airlines that has been consistently profitable is because it, too, has kept it simple. Historically, Southwest's fleet has consisted of one type of airplane, the Boeing (BA) 737. This keeps the company's costs of maintenance and parts lower.
Now, there's been talk of Chipotle getting into the burger market. That needs to be nipped in the bud. Burger land is already over-saturated, and it is doubtful, in my view, that Chipotle could make any meaningful burger innovations that would put any more butts in the seats. Could it all just be a diversion to take attention away from the chain's current ails? I hope so.
Chipotle needs to stick to what it does best. No doubt, times have been challenging given the seemingly never-ending health-related issues that have plagued the chain. In fact, on Thursday the shares fell 2.5%, allegedly due to a tweet by a best-selling author whose editor allegedly got sick after a Chipotle meal. That perception needs to be fixed.
I was a late Chipotle adopter (as a consumer). I didn't get it at first, but have had many more meals post e-coli than previously. Now, it fascinates me. So simple, from décor to the menu, to putting meals together, and although not a cheap meal, the company seems to have pricing power. The combination of those factors is why Chipotle has historically generated 10% net profit margins.
It's been a rough year for Chipotle, with the shares down nearly 17% year to date, and almost 50% since last October. It currently trades at about 30x next year's earnings, not exactly value territory, but significantly lower than what this company used to command in terms of forward multiples. I've never owned it because it always seemed expensive.
It's still too rich for my cheap blood, and this company has some work to do. Fix the health-related issues and perceptions, and drop the burger madness. Stick to the Jimmy's hot dog and Southwest Airlines formula.