Can Domino's and Chipotle Keep Cooking? | 7investing
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Can Domino’s and Chipotle Keep Cooking?

July 23, 2021

Both companies had impressive earnings and have performed well during the pandemic. The question — and it’s one a lot of investors are asking — is can both companies keep growing at the impressive rates they have been for a very long time (with one E-coli-related blip for Chipotle). Is there anything either chain needs to worry about and can investors still expect outsized returns given how well these stocks have been performing?

Companies Mentioned

Dominos (NYSE: $DPZ)

Chipotle (NYSE: $CMG)

Shake Shack (NYSE: $SHAK)

Starbucks (NASDAQ: $SBUX)

McDonalds (NYSE: $MCD)

Transcript

Sam Bailey  0:15

Welcome to 7investing Now, a show that teaches you how to take a long term view on investing by better understanding what’s happening in the market now.

Dan Kline  0:25

Good afternoon seven investors and welcome to the Friday edition of 7Investing Now my name, of course, is Daniel Brooks Kline. I’m the host of the program. I’m being joined today by my friend and colleague, Matt Cochrane. Matt, we are going to talk Dominos (NYSE: $DPZ) earnings, Chipotle’s (NYSE: $CMG) earnings we’re going to talk a little bit about Shake Shack (NYSE: $SHAK) at the end. But before we do that, I’ve got a question for you. What is your fast food guilty pleasure?

Matt Cochrane  0:52

Food um for the family it’s going to definitely be Domino’s if it’s just myself any any good burger joint I’m down for like so that could be Shake Shack that could be Five guys there’s a few others in our in our area habit burger is really good. So any any really good burger joint is I’m down for at almost any time.

Dan Kline  1:14

Take me to a Boston area roast beef house. That is a unique to Boston thing. Or again a South Shore of Boston steak and cheese which is a completely unique thing. But if it has to be a chain, I haven’t done this in it decades maybe. But Kentucky Fried Chicken. It’s like weird squatty chicken, but somehow those 11 herbs and spices you know, the colonel has done it right. So with that

Matt Cochrane  1:44

Chicken, I used to love it. But I don’t know we tried. We tried Popeye’s not too long ago, which I used to love pop eyes and it just just didn’t do it for me anymore. I don’t know it was to like, and I’m not the healthiest guy around but it was just like so greasy. Like even for me. I’m like, I don’t know. Like I felt so bad.

Dan Kline  2:05

It’s been a very long time as the father of a new Wendy’s employee, I will have to pretend I like Wendy’s though. Maybe Wendy’s you should get your hiring system down the app not connected to the store. The managers not connected to any of those systems. It is basically harder to work at Wendy’s which is desperate for employees than it is to get hired by like the NSA like this is not I only bring that up because I think in the fast food world Chipotle and Domino’s both show that the winners are gonna win, that when you have an advantage of business. That also gives you an advantage of investment and advantage of infrastructure. And both of these companies have heavily invested in infrastructure. We would like your fast food comments. If you have fast food Guilty Pleasures you want to share. If you have recommendations for things we should try. I’ll give a little shout out to our shades Rib Shack which Matt and I regularly visit which I think is a regional chain. I’ve seen some other ones.

Matt Cochrane  3:01

There were some in South Carolina. There’s some in South Carolina,

Dan Kline  3:05

I drove through all of South Carolina last week and saw and kept seeing them on restaurants Georgia as well. So shout out to Shane’s Rib Shack because they’ve never had more than four customers. So it’s not bad and it’s cheap. So I really, really hope they do better. But we would love your questions and comments. But Matt, as we get into this, why don’t you give us the 10,000 foot overview of how Domino’s did in the most recent quarter.

Matt Cochrane  3:27

Alright, so the headline numbers just just real quick, great numbers. Everybody was worried Domino’s had such a great second and third quarters last year because of COVID. Nobody was going out. And they just like they nailed it last year their sales same source sales were up like 16 17% last year and everybody was worried is Domino’s same store sales streak growth going to end? And it didn’t same store sales in the US were up 3.5%. Over on a two year basis. Now same store sales are up almost 20%. So that’s 41 straight quarters for US Domino’s locations of the same store sales growth internationally, same store sales jumped at 13.9%. That’s 15.2% over two years. That makes it 110 consecutive quarters of same store sales growth for international Domino’s locations. So those streaks are intact. Revenue came in at 1 billion little over $1 billion. That’s more than was expected. It was up double digits. EPS came in at $3.12. Again, that was more than what was expected. So Domino’s, if you want to look at just the high view. Great quarter.

Dan Kline  4:45

So Matt, let’s talk about those streaks because I feel like they have to end at some point. But do you feel and this is anecdotal? Because I think it’s technology driven. I think as their tech keeps getting better and better. If you don’t have to call it Domino’s to order you don’t feel about adding pepperoni which costs extra or double pepperoni or getting some cinnamon, bread stick cheese monstrosity or whatever they sell or, or God forbid, adding a mountain dew to your order.

But are they also do you think attracting new customers because I do feel like in the pandemic, Domino’s like was kind of the short thing like everybody else’s delivery was dicey. And if you place a Domino’s order and I’ve never done it for myself, but I’ve sent some of my my son’s friends Domino’s during the pandemic, it always shows up.

Matt Cochrane  5:30

Yeah, so digital sales, digital channels was represented 75% of Domino sales, which is just, it’s phenomenal. And when they were asked about that they’re like it, we wanted to go higher. And they call out China, which now has 400 Domino’s locations. And they said in China 19 out of 20 orders are from digital channels. And they that’s their goal for everywhere. They want digital channels to go up. It’s so easy to order Domino’s. I don’t know how many new customers they’re getting, but they have 27 million loyalty reward members. So when you can tailor special offers to 27 million customers. That’s, that’s pretty good. And they have several more customers in their database that aren’t part of their loyalty members. So they can reach repeat customers a lot. They make it so easy to order it. So again, 75% of sales on digital channels. I mean that that’s that’s fantastic that that gives them such an damage over the we talked about McDonalds (NYSE: $MCD) a few weeks ago, Dan, they just started a loyalty program. You know, like Domino’s has a 27 million member headstart on McDonald’s.

Dan Kline  6:41

Yeah, and about an 8 million lead over Starbucks (NASDAQ: $SBUX). Although Starbucks also liked Domino’s has millions of email addresses for people who used its Wi Fi that have not opt into the loyalty program. Why is this important? Once they have my information, it becomes incredibly easy to order. So if I’m going to get a pizza, am I going to pick up the phone and call my local place and go get it even if it’s 50%? Better? Or am I just going to be like cheese? It’s late. I want pizza, like just just send it. It’s inexpensive. It’s easy. It’s good. That’s a big advantage.

I’m bringing this up because we’re gonna talk about how Chipotle isn’t quite there yet a little bit. Matt, do you think the secret sauce for Domino’s is that they’re always on the cutting edge of invention. And I’ve talked we’ve talked about the commercial. I think the current commercial is misleading. They’re testing driverless delivery, they have no intention of ever having driverless delivery being an important part of their service. The neural vehicles, they’re testing that fit two medium pizzas, and only bring them to the street. This is like when they tested having reindeer deliver pizza. But that’s just the false front. their actual innovation is things like how they produce the pizza, how they get more efficient. The pizza tracker is actually owned by a Domino’s nobody else can do that type of showing you the progress of your order without licensing it from Domino’s. And I have no idea if they’ll ever be willing to license it so Matt It’s clearly not food. Is it the endless testbed that’s keeping them at the head of the pack?

Matt Cochrane  8:04

You know, it’s not even I mean, they do spend a lot on technology, right? But it’s not like this giant money pit for them. They seem pretty smart with the with their investments in technology. I would say more than producing the pizza. It’s how people order so we just talked about 75% of sales come from digital channels. Well, like that one that makes it a higher margin. So you’re, you know 20 years ago Dan, I want to order Domino’s for  my family. Hello this is Domino’s. What I take your order, I want two large pizzas. Oh, hold on, hold on, you know and they go to the next customer. Oh, this Domino’s, can you hold the gun back to me? Alright, you want one large pepperoni. That’s think they don’t have to do that anymore. It’s just all digital.

So now you don’t have people answering phones you don’t have people like even really you only have 25% of people like coming in and saying like I want this and this ordering in front of a cashier it’s all digital so they just get their orders they don’t need anyone taking these these orders. And going back to your your your prior question about like their new customers. They’re doing a lot and carry out Sam, I think we have a graphic for this about their market share and the pizza market. So look, they have overall they have 22% of the quick service restaurant piece of market share. They have 36% share and delivery but in carry out they only have 15% of carry out. So this is what they’re talking about like where they really want to capture new customers. There’s a few ways they’re doing that.

So first of all, it’s called a fortressing. So that entails like increasing their store presence in existing markets to provide better service to customers by shrinking the geographic coverage per store. So like in other words, they want to have more stores so if if a Domino’s now in my home market covers like a two or three or four mile radius, they want to shrink that to a two mile radius or you know and that makes it much more convenient to pick up and they think that’s a great way to order carry out. They have curbside pickup up now.

And when you go and you check in at the restaurant you’ve already ordered on the on the app or on a digital channel. When you go in, you check in, and then a two minute timer starts. And as soon as that timer ends, if they don’t have, they have not brought out your pizza. By the time that timer ends, though you get a free pizza on your next order. So they just different ways like that. And what I put that on Twitter a few weeks ago when someone’s like, well, Pizza Hut does the same thing with the curbside pickup Papa john says something similar. Nobody has a two minute timer with that kind of offer. And it’s these little, just these little innovations that Domino’s has, it just puts them up above everyone else.

Dan Kline  10:37

And nobody has the app. So you can have a set order in your Domino’s app where if Matt knows for his family, they always get the same thing every time. He can do that in basically one click. And they also have a very visual app. And I know this sounds silly, but it’s easier to order like a half pepperoni, half. You know, broccoli, if you can visualize it. And I don’t want my wife’s broccoli touching my pepperoni. I think that’s a fair thing to say.

But Matt they do have one major hurdle and Max Lucas because we see your question, we’re going to take it later on. We would love questions and comments about Domino’s, a bunch of pote lay about the fast food industry at large. If you want to ask me about the noid. I’m a big fan. Feel free to go ahead. Matt, what is the major hurdle facing Domino’s right now?

Matt Cochrane  11:20

Well, it’s got to be labor. Right. And I know, you know, this, Dan, but they were talking about this is a tough market. And they’ve mentioned this for several quarters down there. Everybody is having a hard time hiring.

Dan Kline  11:31

Yeah, and the challenge is, Domino’s has traditionally not been a top tier, you know, on the hourly payment schedule. So they have been looking at encouraging franchisees to pay more selectively supporting wages in some markets. So it’s something that company is aware of. I also think it’s part of why you see this push to digital, you mentioned, if 75% of the orders don’t involve me picking up a phone or taking your order at the counter. That’s labor that’s not needed. And we’re actually seeing this in Starbucks, which is a much more labor intensive model.

Starbucks has worked really hard to take as much labor out of everything except producing beverages as possible. And I really think that’s where Domino’s going. There is another hurdle here. But it’s a short one. They’re facing pandemic related delays on getting building permits approved to all of you who couldn’t go to court to get you know, papers filed, or whatever it is, that’s having an impact on the corporate level. I only mentioned this, because going forward, I think it’s not that relevant. If you see a quarter or two, where Domino’s doesn’t open the amount of stores you’d expect them to. Because I do think you then see the next quarter where all of a sudden they open 500 stores instead of 40 the previous quarter. So I think we’re gonna see some lumpy results. Matt, I’ll give you the last word before we move on.

Matt Cochrane  12:46

Yeah, so I wanted to eat worry too much about that stuff. As far as labor goes, you’re right. I think they even mentioned in higher end markets, like they were having a harder time hiring people and you know, probably just speaks to the demographics of that area. I would say like Sam if we could go back we have a slide about their their franchisees and 95% more than 95% of us franchisees started off as drivers, pizza makers or other in store workers. So why is that important? Because they can take a quality a potential employee and give them like opportunity and opportunity can be a huge selling point when you’re trying to hire and you say look, you you work here and you can own your own store.

Now, go back Sam to the market share graphic we had from their investor present this from investor both of these slides are from investor presentations earlier this year. 48% If you look at the picture on the left 48% of the quick service restaurant pizza market share in 2020 was from independence like just these like these one offs or like a really small chains in certain regions 48% they cannot offer employees that same that same opportunity, they can’t say Oh look, we have 1000s of stores and we have a great franchisees model and then one day if you work here you can you’ll have that opportunity. So that’s a that is an advantage Domino’s has when it comes to recruiting talent

Dan Kline  14:17

Matt is their stock getting expensive this has been a company on an unprecedented roll is that something we should be worried about the actual valuation and share price here?

Matt Cochrane  14:25

The shares are always expensive at Domino’s so like it’s one of those like you know great companies are going to be expensive we have a chart from this from our our friends at YCharts like just showing their P/E ratio over the years like look and right now after after it it’s the stock price has gone up incredibly the last four or five months and you can see like where it was like considerably below its five year average now it’s considerably higher than its five year average. I don’t know if this would be like my favorite time to like quote unquote like backup the truck on on Domino shares up but I own Domino’s and i’m not selling any shares based on valuation,

Dan Kline  15:02

We’re going to move to talking about Chipotle, we see some questions and comments. We would love more questions and comments. Say hello, tell us what your fast food guilty pleasure is whatever it is you would like to do. So here’s what I’m gonna do here, Matt, I’m going to set the table and I’m gonna have you asked me the questions in the document because I know Chipotle, a little bit better than you do. So what happened in the most recent quarter, same store sales were up 31.2% that’s a monster number. But it is a little bit relative to the pandemic. They had some blips for the year ago number lockdowns, some closures. So it’s a great number. But it’s not a typical number, don’t you know take it with a bit of salt here.

They earn $7.46 per share that tops estimates I am never a big fan of estimates. But still, that is a very big quarterly earnings per share number. They expect same store sales growth of low to mid double digits in the third quarter. That is ridiculously impressive as well. Digital sales jumped 10 and a half percent, making up 48.5% of the company’s quarterly sales. That’s stunning. That’s up from a very minimal amount pre pandemic, these are really big numbers. And they are at 23 million loyalty members. That is impressive as well, because one higher than Starbucks lower than Domino’s, but still a very high number, they came very late to the party. This was a company that did not believe it needed a loyalty program, it needed to have even an app for a long time. So getting to 23 billion shows you the incredible connection Chipotle has with its customers but Matt —

Matt Cochrane  16:40

Just real quick comment on that Dan, like I love how they they use your digital channels to like you, like they were talking about like making quesadilla like a digital exclusive products. So you can only only order that digitally. Um, and they talk about like they know, because of the data they have, like, if you like pork more than chicken. So when they advertise send you an offer on the app, like about their new quesadilla offering, or or whatever, they’re going to talk to you about the Hey, try our new pork quesadilla. And if you’d like steak, you know, they’re talking about like the new steak quesdilla.

And I love how they they individually tailor those options to their customers. And you know, I mean, like the two similarities, Dan, you can’t help but notice, like digital sales, and customer rewards, I think Chipotle and Domino’s have the most loyalty members of any two other restaurants, you know, in the industry, and in digital sales 50% for Chipotle 75% for Domino’s. I mean, you know, they’re both and both of those are, those are higher margin orders when you get that.

Dan Kline  17:39

So there’s also a method to the madness here. So you mentioned quesadillas as being a digital only item, if you walk up an order a quesdilla, they’ll make it for you, I’ve never seen those, they’re never gonna turn down the business. But the reason they’re pushing those as digital only, is because they take time, most of their items just get assembled, they don’t get heated, the quesadilla has to go into I haven’t seen it, I’m going to assume it’s a press and get melted. So if they know about that ahead of time, and they tell you, your order is going to be ready in seven minutes, then you have an expectation, they have the time to do it, as opposed to if I order it in line, and it takes a 90 seconds in the warmer that’s 90 seconds, the entire line is getting backed up. And one of the negatives about Chipotle, before they started with these digital image initiatives is that you’d have two people in front of you at line at Chipotle, and it would take 30 minutes.

That doesn’t happen nearly as much because putting orders through the digital system. So my first question to myself here is what has Chipotle got right? I’ll let Matt ask the next question. What they’ve gotten right is a very major thing, they put a second make line in all of that stores. What does that mean? The make line is when you go in and you see all the little stations with the little bits of meat and little things of guacamole and cheese and sauces or whatever it is, they have a whole second one of those in the back. So when I placed my digital order, they can have the guy in the front make the order for the people who are physically there and speed that along and someone else is making them for me in the order they came in for the people ordering in the Chipotlane. And that is an incredibly efficient process. So imagine a chain saying about two years ago, maybe three years ago, we’re gonna double our production capacity in every restaurant. And they’re basically there now and that’s paying off incredibly Matt. I’ll let you go to the next question here on the list.

Matt Cochrane  19:25

Well, okay, we talked about what they’re doing right, Dan? Are they doing anything wrong?

Dan Kline  19:30

Yeah. So they’re going to fix this. And I liken it to when Walmart first went to two day delivery, and it was a giant mess. You know, what are five items, three of them would come in separate boxes, one of them wouldn’t show up. The fifth one, it would tell you to go pick it up at the store like it was a disaster. And that eventually sorted itself out and they basically announced something they weren’t ready to do. And that’s kind of how the Chipotlane works. So most people are used to drive thru where you drive up to a window, order something and then go get it. Well, the Chipotlane works that you order it digitally, and then drive through and pick it up. The problem is a significant amount of customers don’t know that.

So they drive through and get to the front and place an order. That is a choke point, that is a problem, the method they use, even when you get there to claim your order is a little wonky, because all the box bags look the same. And they’re doing such a high volume. They haven’t figured out how to alphabetically, segregate things yet. So yes, they’re doing that wrong. And I think it’s going to take some time. I also think they’re very slow on new menu innovation. And they were zero on new menu innovation before Brian Niccol took over. And I really expected once he took over and put in a very strong system of vetting new items. I really thought we would at least quarterly get something exciting from them. You know, I’ve said it before bring chorizo back. I thought it was a great product. But they were testing some dessert items. There’s a lot of things. Really all they’ve introduced is is a slightly different beef and queso. And their queso has still not in my opinion, hit it 100%.

Matt Cochrane  21:02

They talked about that on the conference call. They call that cauliflower rice as an example. They said that brought in some customers. They’re trying out brisket now which is past the like the testing stage, and they said that’s going to be rolled out to more locations. Um, Niccol said he he’s aiming for two to three menu innovations a year. Dan, my question would be like, if they did more than that, would that mess up their efficiency? Like, their ordering line?

Dan Kline  21:31

I think they have to be very clever about it. And you know, Mexican food is largely similar items in different packages, a burrito, a taco, a bowl, those all use primarily the same ingredients. So it’s figuring out things like how can we use our tortilla chips, unsalted to make a dessert? How can we offer a Nacho product that uses all the items we have here in our queso? Like, it seems logical to be that chips, plus meat, plus whatever toppings you want. plus queso equals nachos. And that would be an easy, low hanging thing. I think they could do some beverage innovation. They have markets where they have liquor licenses, and they have beer, and they have Margarita and things like that. They do have interesting sodas in some place. But I think they could do like a featured beverage with their partners and have more fun. Taco Bell does a really good job with that. Even though I’m not particularly a fan of you know, the latest Mountain Dew freeze or whatever it might be.

Matt Cochrane  22:22

Doritos locos tacos or whatever. Yeah.

Dan Kline  22:25

Yeah, this is a little bit of a nitpick. The other thing I would love is, Can my food be hot? Like, I know, that’s not how their system is set up. But part of the reason I wouldn’t order a quesadilla because I don’t eat flour tortillas. But I boy do I wish they could put by my corn tortilla through that press, because I actually like getting Chipotle delivered because I could throw in the microwave for 15 seconds. And it’s hot. And you know, and that it doesn’t look great. But I think it’s actually perfect there.

Matt Cochrane  22:51

So Dan, let me let me ask you a question. Is breakfast like inevitable here? Would that be a winning move for Chipotle putting like a breakfast burrito, like something like that?

Dan Kline  23:00

So I find it frustrating that they don’t have breakfast? Because I look at this. As a retail operator. We’ve talked about it, I ran a retail store. And when I ran the retail store, what did I try to do? I paid the same amount on the building more or less whether we’re open or we’re closed I slightly incremental heating or cooling cost and obviously some labor costs. So if we opened at nine in the morning, and didn’t have any customers till 11, I would be like, Okay, can I have mommy and me storytime where I sell the moms coffee? The kids get to read a book, the parents maybe buy a book, they buy some incremental things, and I only have to have one person in the store for that to happen in addition to like a cashier running the thing.

So how can I maximize it? Well, I would look and say okay, I have the Chipotle a building. I have the app I have the drive thru. A breakfast burrito starts with the burrito. I have burrito. So what do I need? I need eggs. Okay, that’s a new ingredient. I need chorizo, I need bacon. So some things that are not normally on the menu. But you know what? I don’t need. I don’t need chicken. I don’t eat pork. So see in the morning, I could have those things. I think it’s such a simple ask.

I also think there’s some Mexican breakfast items they could do that go beyond the breakfast burrito that they could really do some interesting innovative things, and it wouldn’t be expensive. And again, they’re already there. And you know, I know I’m looking forward to trying Wendy’s breakfast. I haven’t done it. It looks way better than McDonald’s breakfast. But if you told me tomorrow Chipotle had breakfast, even just customizable breakfast burritos, or maybe arepas or something else like, you know be like the Mexican breakfast bar on a Carnival Cruise ship. I’d be happy to go there. Matt, do you think they do well with breakfast?

Matt Cochrane  24:36

So let me ask a bigger question about about breakfast because I actually you put this in the notes and I was thinking about it and I was like Domino’s should make breakfast pizza. You know, I was thinking like something like that. Is breakfast a game of diminishing returns like so McDonald’s. I don’t know. But I feel like any totally just McDonald’s was the first like big fast food restaurant to really roll out breakfast and like it was huge for them. Because nobody else was doing it, and then Burger King started doing and then chick fil a and Wendy’s and Taco Bell, and whoever else is now everyone’s doing breakfast. There’s only so much fast food breakfast. I feel like you know you have Starbucks you have Dunkin obviously. Yeah, so now everyone’s doing it. Is there room for everybody to be offering breakfast products and for it to be as attractive as as it is now or as it used to be?

Dan Kline  25:26

So Wendy’s has shown there’s room and breakfast if you execute Well, I would assume Wendy’s is taking share from Burger King and McDonald’s. Not that I actually think some of the McDonald’s products are pretty well executed and as much as I love their croisandwich it just looks terrible and they don’t do a great job executing at Burger King. Chick fil A’s breakfast is awful. I’m sure that the chicken biscuits good but like their breakfast bowls. They’re they’re sad looking. They’re small. The eggs aren’t great the stuff in it’s not great. It doesn’t live up to chick fil a or the reputation of chick fil a.

When I look at Wendy’s breakfast, I go Wow, that’s a much fresher looking take on a breakfast like the breakfast Baconator and you know Max Lucas shares that Wendy’s breakfast is incredible. The Breakfast Baconator looks delicious. It’s health reasons that I have not succumbed the frosty-cchino I’ve had many times not necessarily as a breakfast item is a pretty cool snack. So I think of Chipotle a really leaned into how can we do a high quality Chipotle a breakfast and also how can we have alternative we know Chipotle is not always healthy. You can order a very unhealthy meal at Chipotle a, but you could order a healthy meal if you want to.

And I think Chipotle a could fill that niche. The biggest problem and the reason I don’t think they’re going to do it anytime soon, is we don’t know what breakfast hours are. And I think this is probably hurt McDonald’s. In the old days when people commuted to work. Breakfast was a normal hours now that you work set hours, you probably no sometimes get a coffee or whatever and are working a regular schedule. If you’re like a teacher, you work normal hours. If you’re an office worker who no longer goes to the office, breakfast might be new. So like you really have to struggle with when do you get off for breakfast? Or do you have to do like wah wah, where breakfast has set hours where they put it out, but you can also order breakfast items the rest of the day.

I think it’s a giant mistake that McDonald’s got rid of its 24 hour breakfast menu, it’s all day breakfast menu. I know franchisees didn’t like it. And McDonald’s is in constant negotiations with its franchisees. But if it’s three o’clock and um, haven’t eaten yet, boy mcgriddle would be great. You know, and I think Chipotle has some room to play with this, where they could you know, really just adding eggs and bacon to the regular menu gives them an enormous amount of optionality with all day breakfast or breakfast.

And obviously there’s some things you could do with with tortilla chips you can do with, you know, cinnamon based desserts. I think there are a lot of things I also think Chipotle has done nothing with coffee. And if you went with a true Mexican coffee experience, you might be able to capture a part of the coffee, the coffee market that no one in the US is trying to do. No one is doing Mexican coffee, which is a unique item compared to how America certainly no one’s doing Mexican hot chocolate, which I think would be a big sell. Starbucks has dabbled in it on occasion. So would you go there Matt? Would you eat a Chipotle a breakfast?

Matt Cochrane  28:16

Maybe? Like I don’t know, like, like, I would try it out a steak a steak egg and cheese burrito sounds pretty good. You know, but but but probably, Dan, there was a few comments they made about labor, actually, that I would like to go through if we have time for that, like I thought it was.

Dan Kline  28:36

Absolutely. I have real thoughts here. But I asked the question and I’ll answer

Matt Cochrane  28:41

Well, sure. Well, I was just gonna say like, they point out a lot of cool things in our conference call they had a nationwide career day not too long ago, they have degree programs. 90% of manager roles are filled from within, which reminds me of that stat we shared from Domino’s where 95% of franchisees are come from within the restaurant system. Again, manager not as quite as attractive as being a franchisees owner. But still that’s that’s pretty good statistic they pay an average of $15 an hour wages is Chipotle going to struggle to have to have a labor issues in this environment?

Dan Kline  29:14

So Chipotle was a company that paid close to minimum wage in many markets, but offered you a very quick advancement path, and has had an amazing history of internal promotion. So you could go in a few years from guy in the line making very low wages to manager of a store to General Manager to regional manager who makes well into the six figures. They’ve been really good about that. So that reputation will help them increasing the floor to $15 an hour will get them better candidates, it will also get them worse candidates and that is something they have to deal with. So if you get someone who really wants to work their way up at Chipotle and is willing to take lower wages to do that, that is self selecting that is an advantage. It forces people to work harder.

I know that’s anti labor, but but it Good a strategy that has worked for them over the years. So I do think at $15 an hour, they’re going to get a certain amount of people who just want to be workers, and that’s fine. But they’re going to have to do more work to identify who the next generation of managers is, I think they’re gonna have to do more with education benefits, you know, and really continue to be because they really have been a model place to work, they’re gonna have to work on continuing that because a lot of other players are paying that McDonald’s is encouraging franchisees to pay more McDonald’s always been a career path Taco Bell is testing paying certain store managers, you know, six figures.

So you don’t want to have like, okay, we were always the best management path. And now other people are offering that so our mid level people are getting poached to go run Taco Bell’s. So you’re gonna have to be very vigilant about it. But I actually think that’s really baked into the company’s DNA, the hard work of start at the bottom, and very quickly, I’d be like, you know, within six months move up to being a shift manager and making decent wages and learning management. And I think it’s an incredible advantage. If you are a general manager or regional manager to have known every aspect of that business.

That’s how McDonald’s has historically done it. Like you want your general manager to get the phone call saying that the the shake machine doesn’t work. And he’s read the manual for the shake machine. He knows how that that works. You know, He’s, uh, you know, he’s had long trainings, which I assume are led by grimace, you know, about how the fry machine works and all the other things. I think Chipotle has done that incredibly well. But Matt, I’ll ask you, because I know you have a chart here is Chipotle, which is trading at blockbuster numbers too expensive?

Matt Cochrane  31:37

Well, let’s throw it up. So, yeah, so I would say yes, but it’s always been too expensive. So I don’t you know, it does well, I would also say it sounds like they have a lot of opportunity to drive up margins in each store. Um, they have a lot of opportunity to increase sales. So, you know, with that kind of earnings power like that P/E ratio is is incredibly high for a restaurant at the same time. I don’t know if it’s, quote unquote, too expensive. I will say, Dan, you know, look, I think it’s very hard to invest in restaurants, it’s very hard for restaurants have a real economic moat, like a competitive advantage.

Like, I mean, you know, we’re talking about guilty pleasures, and I’ll take any good burger joint, you know, it doesn’t have to be one specific kind. Because, I mean, I like burgers, you know. And so, burgers and fries and a chocolate shake. And man, you You got me, you got me. It’s really hard. There’s only three restaurants, I think that are really maybe investable. And we talked about two of them today. The other one I’d probably throw out Starbucks, I think you’d have a hard not not I’m not an expert on the industry. So I’m open minded on that someone can change my mind. But you’d have to convince me otherwise, like that. There’s another restaurant out there that’s, that’s really investable, Domino’s and Chipotle they they’ve done really well to build up a brand to build up their digital sales, infrastructure and loyalty rewards. And you know, who else has done that Starbucks? And that’s why I think those are the three restaurants that like, I’ll I’ll take as as acceptable answers to invest in.

Dan Kline  33:06

I tend to agree with you on that. And 7investors, you’ve been awfully quiet, we’re going to take at least one question or comment in a minute. We’re going to wrap this up with why are both of these companies succeeding before we do that, let me remind you that we are towards the end of July, we are putting the finishing touches on our August recommendations. What do we do with 7Investing lead advisors every month, we give you our highest conviction stock pick for that month, so we go I like this whole budget companies. But here’s the one I am most enthused about. I will say Matt played a major role in my pick for this month. It’s something we’ve talked about a lot. And it’s a company I’ve always loved. But I was very hesitant to buy it because I’m not their core customer.

And while I do shop there, because there’s what very convenient to me, you know, near near one of my homes, it was not a place I considered you know, a favorite. And Matt made it pretty clear that that’s not that important. And I’ll argue that about Domino’s as well. I am not a Domino’s customer. They do do a shockingly good gluten free pizza. So if it was one in the morning and I had a limited option I probably would order from Domino’s frankly more so than a local pizza place is gluten free pizza but that’s a very specific niche. I eat very little gluten but if you see me out cheating, I do cheat Matt and I cheat pretty regularly at a pizza place.

But it is that good a pizza place that it is worth the stomach pain the next day but if you’d like to become a 7Investing subscriber that is $49 a month or $399 a year and again, I’m a long way from school but that is about two months free. If you’d like to be a member go to 7Investing.com/subscribe bring your credit card we do not take cryptocurrency yet, you cannot barter with us. I’d love your goat but we can’t do that. So join us at 7Investing.com/subscribe Matt. Let’s get to the edge here. That’s why are both of these companies succeeding?

Matt Cochrane  35:03

Well, I mean, we already touched on a lot of it, but like real quick like loyalty members 27 million for Domino’s 23 million for Chipotle, a digital sales that represents 75% of Domino’s sales 50%, almost 50% of Chipotle. A sales like that those are higher margin orders, like we talked about, it’s much easier to order. It’s a way to automate the store like look, making a burrito, it’s gonna be really hard for a robot or machine to make a burrito customized every single time making a pizza with different toppings on half on one side or something like that. That’s really hard to get every time it’s hard to automate those kinds of things. What’s easy to automate is what the Domino’s and Chipotle have attacked with these digital sales. That’s awesome. They do a fantastic job on that. And obviously, those are the two biggest reasons I think they are succeeding.

Dan Kline  35:48

Yeah, it’s relentless innovation. These are companies that are always saying how can we do it better? Do I think that the pizza more than the burrito will be made by a robot? Yeah, I do. I don’t think it’s that difficult. The technology exists. I’ve seen it at trade shows. But do I think Domino’s will use that to get rid of people? No, I think people will be involved in expediting and making sure everything works. And you get your order fastest and the store has what it needs and the little shaker full of red pepper has fallen. And the little to go containers of that are ready. Both of these companies and I joke about it because Domino’s always advertises the ridiculous end of its technology. Like we’re going to use drones. It’s like, No, you’re not. But you’re going to find the best possible way to get me a pizza, whatever that is. And like we don’t talk enough about how Domino’s could deliver you a pizza on the beach. That’s insane. The fact that they have like something like 20,000 spots that they

Matt Cochrane  36:38

I think it’s 200,000 200,000 hotspots. Yeah. So like, like, it’s something you rolled out a couple years ago. And like, you know, you’re at a park Pavilion. And you know, you might not know the address of the park, but it’s called a hotspot Are you at the beach, like you said, and you want to order some pizza or something like, and they have these hotspots all over the country to make it easy to order. I mean, just things like that. They always have that little extra thing that they can do better than the competition and seems like they’re always doing that. Like we saw it pop up with the curbside pickup the two minute timer, just little innovations like that can make a lot of difference.

Dan Kline  37:11

Yeah, the next time Matt is at a family event, like a wedding or something, I’m going to send him during the ceremony, a dozen Domino’s pizzas, that Uh, no, I’m not, of course going to do that. I wanted to talk about the one real quick.

Matt Cochrane  37:22

We have a chart. So like, when we talk about why these restaurants are successful, they’re outperforming the market. Sam if we have that graph, look, look over the last over the last five years, but you go back 10 years, and I think the difference is even more. But Chipotle and Domino’s have consistently I mean, they’ve more than doubled the market returns over the last five years.

Dan Kline  37:40

These companies have been incredible, I kick myself a lot, that I am not an investor in either. I should have bought Chipotle during the e.coli scandal, because I 100% believed and wrote about that it wasn’t, you know, nothing really bad happened there and this company would come back it took a long time. Actually, that being said, at the time I bought it, we worked at a place where we had trading restrictions or if we talked about something we couldn’t, we couldn’t buy it for I think it was a couple market days before after.

And I was doing interviews on this every day I was talking and writing about it and talking about it. So sometimes we don’t own stocks or reasons that are beyond our control because of our our profession. I want to close out this topic. And we have one more we’re gonna talk about Shake Shack a little bit for about a minute after that. But I want to take the first comment from Max Lucas, in a very quiet comment day from the 7Investing nation here. How well is automation integration going with large fast food chains, restaurants are typically low margin and rising wages and worker shortages seem to hurt these businesses. So it’s going very well on the app side, it’s going very well on the order side. There were some hiccups when McDonald’s rolled out restaurant of the future where people didn’t really know how to use the kiosks. And I think we’ve largely moved past that.

And consumers have realized there’s no shame when you order on an app, that’s a benefit. And also if you want to be a pain in the ass, if you don’t want pickles and half mayonnaise and no ketchup and, and you know, whatever it is, Starbucks has actually had to deal with this that you can customize things so ridiculously that it’s difficult for their baristas to make the orders. That part they figured out the other automation is things like you load the fry machine and then press a button and everything happens like you’re gonna see sort of like let’s call them micro automations where it’s like the McDonald’s McCafe machine. It’s not a barista making your coffee. It’s a guy pressing the right buttons. I think you’re gonna see a lot of that before you see like the fully automated restaurants. Your thoughts on this, Matt?

Matt Cochrane  39:39

No, I think I think you hit it. Like I don’t have too much to add. I think the ordering and app side is where the innovation is and where you continue to see it. Like we’ve been talking about, I think Nobody does it better than Starbucks, Domino’s and Chipotle. And like other kinds of innovation, it’s gonna be a lot harder and probably a lot a lot slower getting there.

Dan Kline  39:57

So overwhelmingly in my Twitter feed When I threw up the question for the finisher, which we’ll get to in a minute, people asked about Chick fil a and Chick fil a is not public. So we don’t know any of the numbers, so we can’t really comment on it. But the other one they asked about was Shake Shack and people are very vehemently fans of Shake Shack and believe that it could be a good investment. I actually pretty much disagree. Now I like Shake Shack, if you said let’s meet at the Shake Shack in Boca, which is, which is pretty close to both of us. I think it’s the only Shake Shack in the area

Matt Cochrane  40:25

Well there’s one in Fort Lauderdale, one in Fort Lauderdale.

Dan Kline  40:28

So I meet you at either of those. Because it’s they have a gluten free bun. It’s a good burger. The ice cream is excellent. And as I said on Twitter, if I’m with our mutual friend, Matt Frankel, at the MGM in, in Baltimore, which has a Shake Shack, if we’ve been playing some cards maybe had a drink or two, somewhere at 10:30-11 o’clock at night, the idea of having an adult shake over at Shake Shack becomes really really appealing and I can’t pretend there might not also be fries with that as our judgment wanes.

But I think part of the reason Shake Shack works is it’s special. I don’t think Shake Shack works as a 2000 franchise, you know, entity I think it might work as five or 600 in the US and a couple 1000 globally. I think it’s very much capped because the second Shake Shack is at every food court in every neighborhood. I actually think it’s it’s not that big a deal, Matt. Am I missing this? Am I wrong here?

Matt Cochrane  41:18

No, I don’t think you are and I like Shake Shack too. I think that’s probably why people like it so much as a as an investment but it’s a it’s a $4.2 billion market cap you know its valuation is very expensive, and you’re getting a lot slower growth and you’re seeing Chipotle and Domino’s so like you know, at the end of the day, I just think like like you’re you’re paying up for slower growth like it for smaller concept so you would think they would show faster growth so that I would want to see that change before I change my mind as an investor.

Dan Kline  41:49

I think they’re very aware of what I’m talking about and that they want to be a tourist areas a destination areas look spending the money to be in a major high priced casino that has a really nice food court. Like they’re the only you know, fast food chain that’s in that food court that has things like you know, you know, fresh seafood and really good Japanese like really excellent stuff. That’s intentional. They are putting shake shacks, places where you’re going to talk about that you went to Shake Shack, if all of a sudden the Shake Shack set, you know, the mall at Boca Town Center, you know, are here at Wellington green or whatever. I’m not so sure it carries over. So they add what is it 30 40 50 stores a year? It’s not that many. And I think that’s going to be the case.

Now, could they have other concepts? Could they? You know, I really think they could do a fast food seafood concept on a high end that might give them some optionality. But I don’t think it’s a great investment. And please, God, don’t get mad at me on Twitter. Like, I like the product. I hope I hope they succeed. I’ll happily buy you a shake If I see you in a Shake Shack, but it’s not something I would invest in. We have gone 15 minutes longer than I expected to today, Matt, this has been a lot of fun. But Sam Bailey, let’s climb up on the top rope and hit our finisher. Which restaurant will be the best investment over the next decade. Almost 40% of you said Chipotle a 15.9% said Domino’s 15% said McDonald’s 29.6% said Starbucks I do not think it’s Chipotle. I know you don’t either, Matt.

Matt Cochrane  43:20

Well, you know I’m gonna say Domino’s. I was campaigning for Domino’s on Twitter, and like it’s still almost last barely beating McDonald’s but no. Think McDonald’s out of those four. I’m gonna pick McDonald’s. That’s the stock. That’s the restaurant. That’s the one restaurant stock I own. And like I’m sticking with it for a reason.

Dan Kline  43:36

You mean you’re gonna pick Domino’s?

Matt Cochrane  43:38

Yes, Domino’s, sorry, yes, Domino’s 100%.

Dan Kline  43:40

So I could hear your argument at Domino’s. Let me make a case for Starbucks. Both Starbucks and Domino’s are adding stores. But at some point, they’re gonna max out. I think Starbucks has a massive opportunity in grocery with its partnership with Nestle that we’re just seeing the beginning of we’re seeing an increase in beverage products. I just bought some Starbucks some Starbucks cold brew concentrate, I buy the little nitro cans all the time I buy the low fat double shots all the time. They’re increasing that but they have the ability to go into ice cream to go into all sorts of you know, coffee creamers, they have a nice selection of they can really grow that.

I also think they have a massive opportunity to grow their premium business, you know, adding maybe 10% of their stores adding a premium bar with higher priced items, you know, whiskey barrel aged coffee, I think they can expand the standalone premium store and roastery business. So I think both Starbucks at Domino’s are good investments and good choices. I just think there’s more optionality because Domino’s has not done all that well, in adding other food items. I also think I’ll let you weigh in in a second here. Yes, Starbucks has not done food well either. And maybe with the princey Bakery, which which is operates out of the roasteries. Maybe at some point they’ll figure out a lunch or dinner menu that works. And I’m not sure if the Domino’s breakfast offers that much of an opportunity. Your thoughts, Matt?

Matt Cochrane  44:59

So, Starbucks is a great restaurant. So I’m not going to say too much bad about it, I would say if you were going to make a case for Chipotle, they have all of those four choices, they have the least international presence. And I think that might be a real growth driver for them. That is not talked about too much when it comes to them. But they were talking about their stores in Canada, they’re opening up to, they opened up two stores in England, just last quarter. And they talked about like how sales were there, we’re doing much better than expected. If Chipotle has an international opportunity, and they have company on stores. That could be a huge growth driver for them in the next decade.

Dan Kline  45:37

I actually think that is possible, but I’m gonna stick to staying Starbucks

Matt Cochrane  45:41

I’m sticking with Domino’s, but just throwing that out there.

Dan Kline  45:43

If you would like to get in touch with us, you can send us an email at info@7investing.com. If you would like to reach out to us on Twitter, we are @7Investing. And as you can tell, we talk about fun stuff. We put up polls, we talk about the noid we have deep financial debates, both Matt and I have put up some very long chains of tweets over the recent months, we’re interactive, we love to talk to people. I actually was explaining today to some what I did a podcast this morning for the broadcast retirement network, which I do every week as a 7investing representative. And we were talking about Twitter earnings. And I said, you know fintwit, is this amazing pocket of Twitter that isn’t negative that when someone does something like toxic, that person actually gets shot down and like everybody else is supportive, even when you disagree.

It’s like a very upbeat, disagree and like, I don’t care if somebody disagrees with me, I’d Shake Shack, that’s awesome. But if somebody if someone’s like, Hey, you don’t agree with me on Shake Shack, your house should burn down? Well, I don’t want that and fintwit is the opposite of that. It really is a very supportive community. And I say this because we’re going to be having a lot of guests on 7Investing over the late summer and fall that are just some of the bigger names some of the people out there that you know from fintwit, maybe you don’t know the person behind it. Maybe you know the character they’re playing online. We’re going to put some names to faces in the coming weeks here on 7Investing Now. You were a quiet audience today. Not a ton of participation. But we hope you will be back to that on Monday.

Matt, I think I’m actually doing all three shows from home next week, which has been actually very rare. And then I get back on the road that I will be in Vegas. I will be in Baltimore. In September, I will be back on a cruise ship doing shows from who knows where. So it is going to stay and get busy, I think have an August show or two from Davenport. Maybe, maybe you’ll join me down there on Labor Day and we’ll do a while we don’t do a labor day show but maybe we’ll tape something at that point. So there’s a lot going on here are in the 7investing world. But for Matt Cochrane for Sam Bailey behind the glass. I am Dan Kline. Enjoy the rest of your Friday. We will see you on Monday.

 

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