Fast casual restaurant stocks like Chipotle (CMG) have been the darlings of Wall Street analysts. They are awarded the biggest multiples and supposedly have the best growth prospects.
Unfortunately, the numbers don’t bear this out.
Hedgeye Restaurants analyst Howard Penney explains why in this excerpt from The Macro Show. “Fast casual is supposed to be the godsend of the restaurant industry,” Penney says. “This is the category Chipotle competes in and it’s actually doing the worst of every category in the restaurant space.”
Looking at industry segments broken down by the percentage of individual brands generating positive sales growth reveals some interesting findings.
- Fast Casual is the worst-performing segment with just 23% of brands generating positive sales growth
- Quick Service is the top-performer, at 78% positive sales growth
“Clearly, I see a share shift moving from Fast Casual to Quick Service and this is a function of a slower economy,” Penney says. Quick service is a cheaper price point, with an average check of $6 versus $10 for fast casual. “It highlights one of the reasons why I’m negative on Chipotle,” he says. “I find it strange that someone would make a billion dollar investment into a category that is not as competitive as it once was.”
Just one of many reasons why Penney sees “significant downside” in Chipotle.