Chipotle under attack by noodles and clones

Chipotle under attack by noodles and clones

7:43pm EDT

By Lisa Baertlein

LOS ANGELES (Reuters) – Chipotle Mexican Grill (CMG.N:Quote, Profile, Research, Stock Buzz) is one of the restaurant industry’s hottest stocks, but fickle diners and an ever-expanding selection of entrepreneurial eateries threaten to make it harder for the upscale burrito seller to keep delivering the explosive growth investors savor.

After two decades without significant direct challenges in the “fast-casual” category, Chipotle is bumping up against a bevy of new rivals that also sell $10 meals made right before diners’ eyes in the open assembly-line kitchens it popularized.Contrary to popular belief, the biggest threat to Denver-based Chipotle may not be big, publicly traded Mexican food chains like Yum Brands Inc’s (YUM.N: Quote, Profile, Research, Stock Buzz) Taco Bell or Jack in the Box Inc’s (JACK.O: Quote, Profile, Research, Stock Buzz) Qdoba Mexican Grill, analysts said.

“It’s all these little, new concepts that are springing up everywhere. There is a mad rush into fast-casual,” Bob Goldin, an executive vice president at consulting firm Technomic, said.

“Not only do you have Chipotle clones, you have the expansion of other cuisines,” said Morningstar restaurant analyst RJ Hottovy.

Some of the fastest-growing fast-casual names include established players like Chipotle “clone” Freebirds World Burrito, “better” burger seller Five Guys Burgers and Fries, and sandwich seller Jimmy John’s, Technomic said.

Other new ethnic-inspired eateries specialize in everything from falafel to Vietnamese banh mi sandwiches.

Newly public Noodles & Co (NDLS.O: Quote, Profile, Research, Stock Buzz), a roughly 345-unit chain, dubs itself “your world kitchen” and offers dishes such as Japanese pan noodles, Wisconsin Mac & Cheese and Pad Thai.

Established in 1995 not far from Denver-based Chipotle, Noodles is led by Kevin Reddy, Chipotle’s former chief operating officer, and is tempting investors with its potential for the kind of spectacular share price expansion the burrito seller boasted in its younger years.

Noodles shares now trade at around 113 times 2013 earnings estimates, versus about 35 for Chipotle, but its stock price is an easier to stomach at $43 versus $377 for Chipotle.

“If there’s a long-term threat out there, it is probably something like a Noodles. It’s going to force them to up their game,” said ITG restaurant analyst Steve West.

To be sure, no one is predicting Chipotle’s imminent demise.

The company on Thursday reported higher second-quarter profit after sales at established restaurants accelerated, boosted by more aggressive advertising, catering, menu additions and one more trading day than the year earlier.

It also is testing a new concept called ShopHouse Southeast Asian Kitchen in Los Angeles and Washington, DC.

Even if other chains succeed in luring away some Chipotle customers, they will have a hard time matching the company’s ability to contain labor costs as it cranks out more sales.

Chipotle fan and stockholder Preston Motes, 44, said he is not making any immediate bets on rival Noodles & Co.

“I’ve eaten at Noodles twice and it’s OK. If it’s Noodles & Co. versus ShopHouse, I’d probably go with ShopHouse,” he said.

FASTER, BETTER, CHEAPER

Fast-casual chains like Chipotle appeal to diners by using higher quality ingredients than fast-food chains and offering meals at lower prices than limited-service “casual” restaurants such as Darden Restaurants Inc’s (DRI.N: Quote, Profile, Research, Stock Buzz) Olive Garden.

According to Technomic, 2012 sales at fast-casual eateries jumped 13.2 percent, versus increases of 5.6 percent for fast-food chains and 2.0 percent for casual outlets.

When Chipotle’s stock debuted at $22 in 2006, it had about 480 restaurants. It plans to have roughly 1,600 units by the end of this year.

Some of Chipotle’s growth has come at the expense of other chains – namely rival Qdoba, which plans to close 67 restaurants, or around 10 percent of its units, this year.

Chipotle’s simple, customizable menu features organic produce and antibiotic-free meats when possible. Young families, office workers and college students frequent the chain, which has quietly won over the fast-growing ranks of diners who avoid wheat and other gluten-containing foods for health reasons.

“It’s a safe haven for those of us with eating restrictions,” said Jenna McKay, 27, who avoids gluten due to celiac disease and visits Chipotle so often that she is the “mayor” of the outlet near her job in Sacramento on Foursquare.

Some analysts say the chain could ultimately double in size to 3,000 to 4,000 North American restaurants which would be still far less than the more than 14,000 U.S. units boasted by McDonald’s Corp (MCD.N:Quote, Profile, Research, Stock Buzz), which owned the company from 1998 until it went public.

But the bigger Chipotle gets and the more rivals mimic its successful model, the harder it will be to stand out.

Sales at Chipotle’s established restaurants, a key performance gauge, cooled last summer and subsequently dipped below the mid-single-digit percentage growth that some analysts say the chain needs to protect profits. (Graphic on Chipotle restaurant sales: link.reuters.com/duh79t)

On Thursday, the company dashed investor hopes that those sales would get an additional boost from price hikes this year.

Speaking on a conference call with analysts, executives said they were delaying price increases due to tamer overall food inflation. They also want to replace oils made from genetically modified ingredients and increase supplies of naturally-raised meats before making any such a move.

McKay said she won’t stop visiting Chipotle if prices go up, but depending on the increase, “I may not get a soda or chips.”