Call it a double take.
At first glance, it’s not surprising to see Newport Beach-based Chipotle Mexican Grill Inc. and Irvine-based Habit Restaurants Inc. among Orange County’s fastest-growing public companies (see special report, page 19, lists starting on page 25).
The first is a recent market darling, having lured ex-Taco Bell Corp. Chief Executive Brian Niccol to the same role at Chipotle. Niccol returned the favor, bringing the former Denver-based fast-casual pioneer to OC, where the Bell is based.
Habit’s been here since before it went public in 2014 in a hot restaurants initial public offering market under veteran restaurateur, Chief Executive Russ Bendel.
At second glance, Chipotle made it by an onion skin, just nudging the 15% minimum two-year revenue growth—the price of admission for inclusion on the Business Journal’s list—and Habit ranks made the cut, though it’s out of favor on Wall Street.
Food Borne
Chipotle’s (NYSE: CMG) annual revenue as of June 30 was $4.7 billion, up 15% from $4.1 billion two years earlier.
It’s the ninth fastest-growing large public company—those with more than $500 million in annual sales. Net income for the year ended June 30 was $170 million.
The growth indicates Chipotle has rebounded from highly publicized food-related issues that caused about 500 people to become sick in 14 states, largely from E. coli, salmonella and norovirus.
The chain, which has about 2,450 restaurants in five countries, including about 45 in OC, still isn’t out of the woods.
In August, news reports said several hundred people in Ohio became sick after eating at a Chipotle in Columbus, where the company has a regional corporate site.
Chipotle said last month that it plans to pursue “radical ingredients transparency” in a “For Real” marketing campaign. It launched an Instagram account—“@ChipotleForReal”—and the first thing on its website after the request for a visitor’s ZIP code, are full-color thumbnail icons of “the complete list” of 51 ingredients in its food, from a slew of beans, meats, cheeses, peppers, herbs, and chilies to gypsum, which is used to separate curds and whey in making tofu.
“Chipotle has always emphasized food prepared fresh daily … we wanted this campaign to highlight that,” Chief Marketing Officer Chris Brandt told news outlets at the time.
It’s shifting the chain from a previous harder-core food ethos—local suppliers for instance, which some news reports connected to food quality issues in 2015. But Brandt said the aim is still “food with integrity,” giving diners “access to real ingredients,” and the company has talked up a goal of being a “purpose-driven lifestyle company.”
Chipotle didn’t comment for this article.
To Go
This month Chipotle said it’s looking for someone to replace Food Safety Officer James Marsden, who will step down in the second quarter of next year, and said food safety will be buttressed by its use of software that monitors store operations.
Chipotle shares are up 62% since Feb. 5, the week before it said Niccol would join the company and a month before he did.
Niccol’s initiatives have included menu changes, revamped marketing, and more use of online applications.
Of the 26 analysts who follow the company, 12 have a buy, 10 have a hold, and four rate it a sell.
Last week, the chain reported higher earnings that beat analyst expectations.
Forming Habit
Habit (Nasdaq: HABT) hit $365 million in annual revenue for the year ended June 30—up 42% from $257 million two years earlier—landing at sixth on the fastest-growing midsize companies, which have sales of $100 million to $500 million.
Chief Executive Bendel told the Business Journal that the reason for the growth is fairly straightforward: new stores.
Habit opens 25 to 35 company-owned locations a year, or two to three a month.
Habit’s count grew to about 240 at the end of June. It’s in 11 states and overseas.
Franchisees open a handful a year, producing some top-line revenue for Habit from franchise fees.
Contrary to an industry emphasis on faster growth through franchising, the fast-casual burger chain prefers to build its own and keep them.
“Our job is to be stewards of the brand, stewards of the capital,” Bendel said. “We’re very disciplined.”
Upgrade
Habit hasn’t been rewarded by its stock price. It offered shares in November 2014 at $18, hit the mid-30s the first day—and has declined steadily since 2015 to about $14.36 and a $374 million market cap.
“Valuations [for restaurants] in the fourth quarter of 2014 were incredible,” Bendel said of that hot period, when over about 12 months, OC chains including Habit, Del Taco Restaurants Inc. (Nasdaq: TACO), and El Pollo Loco Holdings Inc. (Nasdaq: LOCO) tapped public markets.
El Pollo Loco went public in July of that year at $15 and hit $24 its first day. It traded last week at about $13.
In June 2015, Del Taco sold itself to a public “blank check” acquisition company that had been trading at $10 to $12 a share before the deal, rising to $16 between the spring deal announcement and its summer closing. Shares traded at $11 and change last week.
Bendel said, “Our peer group has had the same experience,” and that he’s not worried about the share price.
“We have 50% more EBITDA than when we went public. Average tickets are up slightly.” He said average unit volumes for locations open at least a year have held steady at about $1.8 million. “We’re pretty proud of our results.”
It had a net loss of about $3 million last year during a restaurants slowdown after two years of net profit .
“The market has a way of thinning out the herd: Some of the weak will go away,” Bendel said. “Be cautious and careful about how you go.”
Habit has pulled back on growth this year, he said. Long term, he forecasts a strong company with good revenue growth.
Out of the seven analysts who follow Habit, five rate the stock a hold, and two a strong buy. Consensus earnings are five cents per share this year and four cents next year.
“The stock price is the stock price,” Bendel said.
Habit reports quarterly results on Oct. 30.
