Chipotle Memorandum PDF

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A memo to the CEO of Chipotle discussing about the financial position against its competitor, Jack in the Box...

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Chipotle Mexican Grill Inc. To: From: Date: Subject

Mr. Steve Ells, CEO of Chipotle Mexican Grill Inc. Safiya Fellous, Junior Analyst November 10, 2017 Jack in The Box is in a better financial position compared to Chipotle Mexican Grill, Inc.

This memorandum will analyze the performance of Chipotle Mexican Grill, Inc. (“CMG”) compared to its competitor, Qdoba, which is owned and operated by Jack in the Box, Inc. (“Jack”). Jack is financially outperforming CMG as measured by stock prices, earnings per share, Revenue, Net income, and P/E ratio. Jack is in a better financial position than CMG because its stock prices have been growing at a faster rate than those of CMG (Yahoo Finance, 2017). Jack’s earnings per share have also been steadily growing compared to CMG’s which decreased significantly during this year (Yahoo Finance, 2017).

Jack is Chipotle’s closest competitor because both companies offer a fast-casual dining experience. Both companies combine the convenience and affordability of a counterservice, fast food eatery with higher-quality dishes and a more appealing environment. Chipotle and Jack’s menus are very similar, featuring Mexican food at relatively close prices (Investopedia, 2017)

JACK’S STOCK PRICES HAVE BEEN GROWING AT A FASTER RATE THAN THOSE OF CHIPOTLE. Although Chipotle’s stock prices are higher than those of Jack, Jack’s stock prices have showed a consistent growth rate over the last 3 years (Yahoo Finance, 2017). Jack’s stock prices increased at a rate of 1.1% over the period of 11/10/2016 through 11/10/2017 as opposed to Chipotle, which decreased at 2.4% rate during the same period (Yahoo Finance, 2017). As Figure 1 indicates, Jack’s stock prices have shown a consistent growth. Not only are Jack's stocks more affordable, but its earnings per share have been growing at a higher rate than those of Chipotle.

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Figure1: Changes in Chipotle and Jack stock prices between 11/10/2016 and 11/10/2017 (NASDAQ, 2017)

JACK’S EPS HAVE SHOWN A MORE CONSISTENT GROWTH AS OPPOSED TO CHIPOLTE THAT SUFFERED A SIGNIFICANT HIT Although Chipotle offers more earnings per share to its shareholders, the company suffered a substantial decline during the third quarter of 2017 while Jack’s EPS maintained a stable growth rate (NASDAQ, 2017). Jack’s EPS increased by 1.1% during the last quarter of 2017 beating Chipotle which suffered a major hit during the same time period decreasing by 2.6% (NASDAQ 2017). Jack’s EPS increase was driven by margin expansion and decrease in operating costs. Figure 2 demonstrates how Chipotle’s EPS dramatically changes leaving investors and shareholders with no guarantee as to what to expect. Another financial metric that helped conclude that Jack is in a better financial position than Chipotle is Net Income.

CMG and Jack EPS

Figure 2: Comparison between Jack and Chipotle's EPS (NASDAQ, 2017)

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CHIPOTLE'S NET INCOME SIGNIFICANTLY DECLINED DURING THE YEAR OF 2016 WHILE JACK'S NET INCOME CONTINUED TO GROW Although Chipotle generated a larger net income than Jack during the years of 2014 and 2015, the company suffered a major decline during the year of 2016 due to the E. coli crisis causing its net income to shrink (Stock News Times, 2017). Chipotle's net income went from $475 million in 2015 to $22 million in 2016 while Jack's net income increased by 1.4% during the same time period (Stock News Times, 2017). Figure 3 shows how Jack's net income maintained a sustained growth rate while Chipotle's shrunk significantly. Revenue is another important financial index that was used to compare the two companies.

CMG and Jack Net Income

Figure3: Chipotle and Jack's net income over the past three years (Yahoo finance, 2017)

JACK GENERATES LARGER REVENUE PER EMPLOYEE THAN CHIPOTLE Although Chipotle's revenues are higher than those of Jack, Jack is more efficient in terms of revenue generated per employee (Stock News Times, 2017). Chipotle's revenue has been higher than Jack’s for the past three years reaching $3.9 million in 2016 versus Jack's $1.6 million during the same year (Stock News Times, 2017), but by looking at the revenue per employee, Jack generates larger revenue per employee ($72,000) than CMG ($60,000) indicating efficient management strategies. Figure 4 and Figure 5 compare both companies' revenue and revenue per employee. Another metric that was used to compare the two companies is P/E ratio to assess the trade-off between the price of the stock and its expected returns.

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Figure 4: Jack and Chipotle's

Figure 5: Jack and Chipotle’s Revenue per

Revenue of 2017 (Gottlieb, O. 2017)

Per Employee 2017 (Gottlieb, O. 2017)

CHIPOTLE'S P/E RATIO SHOWS THAT THE COMPANY IS OVERVALUED COMPARED TO THE INDUSTRY The P/E ratio demonstrates that Chipotle is overvalued considering that both companies have the same characteristics and serve the same type of food (Stock News Times, 2017). Chipotle is trading at price to earnings (PE) ratio of 54.13, this shows that the stock is overvalued compared to the industry average of 31.9 (Stock News Times,2017). On the other hand, Jack is trading at a lower P/E ratio of $23.44, indicating that it is currently the more affordable of the two stocks (Stock news Times, 2017). Chart 1 compares the P/E ratio of both companies for the year of 2017.

Company

P/E ratio

Chipotle

54.13

Jack

23.44

Chart1: Comparison of the P/E ratio for both companies (Stock News Times, 2017)

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References Farmer, J. (2017, December 04). Critical Comparison: Jack in the Box Inc. (JACK) vs. Chipotle Mexican Grill, Inc. (CMG). Retrieved December 03, 2017, from https://www.stocknewsgazette.com/2017/12/04/critical-comparison-jack-in-thebox-inc-jack-vs-chipotle-mexican-grill-inc-cmg/

I. (2017, November 10). Who are Chipotle's (CMG) main competitors? Retrieved December 02, 2017, from https://www.investopedia.com/ask/answers/052015/who-are-chipotles-cmg-maincompetitors.asp Chipotle Mexican Grill, Inc. Common Stock (CMG). (n.d.). Retrieved December 02, 2017, from http://www.nasdaq.com/symbol/cmg CMG: Summary for Chipotle Mexican Grill, Inc. (2017, December 04). Retrieved December 02, 2017, from https://finance.yahoo.com/quote/CMG/ Boone, M. (2017, November 29). Head-to-Head Survey: Chipotle Mexican Grill (CMG) versus Jack in the Box (NASDAQ:JACK). Retrieved December 03, 2017, from https://stocknewstimes.com/2017/11/30/critical-survey-jack-in-the-box-jackversus-chipotle-mexican-grill-cmg.html Chipotle Mexican Grill. (n.d.). Retrieved December 03, 2017, from http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-irhome

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