In this segment of the Motley Fool Money podcast, host Chris Hill is joined by senior Fool analysts Jason Moser, David Kretzmann, and Jeff Fischer to talk Chipotle (NYSE: CMG), which fed shareholders a major win. But was it the quarterly report that moved the stock, the outlook, or confidence in the changes being made by the new man in the CEO's chair? What should you be looking forward to from the fast-casual chain, and is its stock a buy now?
Also heading for a CEO switch is Domino's (NYSE: DPZ), but what that company has achieved under outgoing boss Patrick Doyle has been nothing short of remarkable. The Fools talk tech innovations, menu improvements, and wedding catering as they consider this steadily rising stock.
A full transcript follows the video.
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This video was recorded on April 27, 2018.
Chris Hill: Chipotle shareholders had their best week in years after first quarter results sent shares of Chipotle nearly 30% higher. And Domino's Pizza shares were up this week after first quarter same-store sales rose more than 8%. David Kretzmann, let's start with Chipotle. This was a good quarter. I don't know if it was 28% good.
Jason Moser: Listen, the market has spoken, Chris.
David Kretzmann: [laughs] Don't doubt the market!
Hill: You tell me, how good was this quarter for Chipotle?
Kretzmann: This quarter itself was, eh, it was OK. Comps were up about 2%, revenue up 7%. So, nothing lighting the world on fire. They are seeing improvement in restaurant-level operating margins, which are now at about 19.5%. Still below where they were several years ago before that E. coli crisis but moving in the right direction.
But I think this is 95% about Brian Niccol, the new CEO at the helm of Chipotle. And I think he's really saying, and hopefully doing, everything that Chipotle should have been doing over the past several years through this crisis. Focused on digital innovation, revamping the menu and restaurants, I think, in the coming months, just, doing a lot of tests there. They've rolled out a new national marketing campaign already without that condescending tone that we kind of got accustomed to with Chipotle. Really just trying to remind people why they like Chipotle -- quality, fresh ingredients. Hopefully, we'll have some new menu innovations coming down the pike, as well.
Moser: Yeah. I think the big question going into this was what kind of a role Steve Ells was going to still play within the business. I mean, he wasn't on the call. His name was mentioned once on the call as just a quick thanks. So, I think, generally speaking, Wall Street is very enthusiastic that this is clearly Niccol's show here going forward, and it sounds like he's up to the task.
Jeff Fischer: And he has a big opportunity, because so much traffic still has not come back. And yet, that's kind of reluctantly so. People want to come back. They want a reason to go back. So, I think he has that laid out in front of him.
Kretzmann: And digital especially, you're seeing some nice progress there. Digital sales were up 20% this quarter, but they still make up less than 9% of total revenue. During his time at Taco Bell, he did a lot as far as digital innovation, menu innovation, and marketing as well. So, bringing some of that over to Chipotle, I think, will bode well. In the meantime, free cash flow this quarter grew 50%. The company is now sitting on over $500 million in cash with no debt. So, they have some flexibility to do some tests here.
Hill: Also, Niccol on the call didn't close the door completely on the idea of breakfast. If you listen to what he said, he basically said, "We're not doing that right now." But, it seems like that option is open to them somewhere down the line.
Kretzmann: Yeah, I'm sure we'll see tests with breakfast, different menu ingredients, hopefully improved queso. So, a lot to look forward to, I think, as Chipotle shareholders and customers.
Moser: I'm going to go taunt them with my breakfast burritos and tell them they can't make them better than I can, and maybe that'll force their hand.
Fischer: Would any of you buy the stock today if you didn't own it?
Kretzmann: I personally would. It still looks expensive based on trailing metrics, trading for about 40X free cash flow. But, I like the direction that Niccol is taking the company. It's the direction I thought Steve Ells would have taken the company a couple of years ago after the crisis. But, if they can get margins back up, which I think they can, due to the marketing efforts they're doing, digital initiatives, I think they can get closer to the glory days.
Hill: I sold this stock within the last six months or so, so I have missed out on the recent gains.
Moser: He was angry, too. [laughs]
Hill: [laughs] Well, I was angry for a lot of reasons. But, no, I think David speaks to my slight hesitation about jumping back in. It still seems like an expensive stock. But, eh, I might throw a couple of shares there.
Can we just say a quick word about Domino's Pizza and the job that Patrick Doyle has done as CEO? Because this was his last quarter as CEO of Domino's Pizza. David, you had posted on Twitter a chart of how Domino's Pizza shares have performed under Doyle, and it's basically up and to the right. It's one of the all-time great turnaround jobs I think we've ever seen, certainly in the restaurant industry.
Fischer: Is there a business hall of fame museum somewhere? Because if there is, he should be in there. There should be a hall of fame for great leaders who have really changed their companies, or the world. Outstanding performance. Shareholders have, I think, been rewarded more than anyone could have imagined. And I love the lesson here that goes to say that something as simple as pizza or coffee or, I don't know, name something else simple, can make a regular investor like you and me a mountain of money if you just buy the stock and keep it.
Kretzmann: Yeah. And the company has been so innovative with technology and doing all sorts of different tests. Something that they're rolling out this quarter is Hotspots. Now, you can have pizza delivered to 200,000 parks, beaches, sports fields, and other untraditional places that don't have a typical address. So, just amping up the level of convenience, especially with that digital platform. And, they have a wedding registry, which is something that I've learned, as well.
Hill: Really? [laughs]
Moser: And they also have pizza insurance, too! Like, if you put your pizza on top of your car and drive off and forget it, you can go back and get it replaced for nothing!
Hill: You know what? If you put your pizza on top of your car and you drive off, I'm sorry --
Moser: Well, you should have had it delivered in the first place, right?
Kretzmann: There you go.
Hill: Really quick, since Jason and Jeff and I have already gone through the wedding process with our respective brides, David, as the only single person at the table, is that something you're going to explore? Is it an option, somewhere down the line, if you decide to get married?
Kretzmann: It's a deal breaker or a dealmaker, either way.
Chris Hill has no position in any of the stocks mentioned. David Kretzmann owns shares of Chipotle Mexican Grill, Domino's Pizza, and Twitter. Jason Moser owns shares of Chipotle Mexican Grill and Twitter. Jeff Fischer owns shares of Twitter. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Twitter. The Motley Fool has a disclosure policy.