During 2018, Chipotle Mexican Grill (NYSE:CMG) returned to strong growth following a couple of bumpy years. Comparable sales rose 4%, total revenue increased 8.7%, and adjusted EPS jumped 33% on a full-year basis.
Entering 2019, Chipotle told investors to expect a steady continuation of its turnaround. Instead, its momentum accelerated as the year went on, even though the chain faced increasingly tough year-over-year comparisons. Last week, Chipotle reported that its excellent year culminated with a fantastic performance in the fourth quarter.
Once again, Chipotle's management is telling investors to expect moderate progress in the upcoming year. However, there's a good chance that it plans to underpromise and overdeliver for a second straight year, which could enable Chipotle stock to continue rallying.
A sparkling end to the year
Chipotle gradually increased its guidance over the course of 2019. However, even at the end of Q3 -- after achieving three consecutive quarters of 10% to 11% comp sales growth -- the company only projected that full year sales would be "at the top end of our prior high-single-digit comparable restaurant sales growth guidance." This implied that comp sales growth would decelerate significantly in the fourth quarter.
Luckily for shareholders, the opposite occurred. Comparable restaurant sales surged 13.4%, representing the eighth consecutive quarter of sequential acceleration in that metric. That brought the company's full-year comp sales growth to a stellar 11.1%. Digital sales rose 78.3% year over year last quarter, driving more than half of Chipotle's comp sales increase. Total revenue grew 17.6% in the quarter and 14.8% for the full year.
Profitability also continued to recover, both in the fourth quarter and in 2019 as a whole. Restaurant-level operating margin improved by 2.2 percentage points in Q4, reaching 19.2%; for the full year, it increased by 1.8 percentage points to 20.5%. CFO Jack Hartung said that full-year restaurant-level margins could have been closer to 22% but for temporary headwinds from high avocado prices and the launch of Chipotle's limited-time carne asada menu option.
Despite these headwinds, Chipotle posted outstanding earnings growth in 2019. Adjusted earnings per share soared 66% year over year last quarter, hitting $2.86. Full-year 2019 adjusted EPS rose 55% to $14.05.
Guidance is modest
For 2020, Chipotle told investors to expect mid-single-digit comp sales growth. Indeed, the chain will face much tougher year-over-year comparisons this year than it did in 2019.
Chipotle also plans to open another 150 to 165 restaurants during 2020, after finishing last year with 2,622 restaurants. Between this expansion and its projected comp sales growth, Chipotle's guidance implies total revenue growth of about 10%. By contrast, analysts are calling for 13% revenue growth this year.
With mid-single-digit comp sales growth, Chipotle's restaurant-level operating margin would improve again, but not nearly as much as it did in 2019. That's not good enough, considering that the stock trades for more than 60 times trailing EPS. Chipotle's operating margin is still only about half of what it was before the 2015 E. coli outbreak, and it's pretty clear that the company needs to sustain faster comp sales growth to get anywhere close to its previous level of profitability.
Chipotle could beat expectations again -- and it needs to
The good news for investors is that Chipotle is well equipped to continue outperforming management's guidance. First, new menu items are likely to arrive at a faster pace, reflecting Chipotle's recent innovation work. That should help to boost restaurant traffic.
In addition, an increasing number of restaurants feature "Chipotlane" drive-through windows. Just last quarter, Chipotle more than tripled the number of Chipotlanes from 20 to 66, and more than half of the restaurants opening in 2020 will have a Chipotlane. The company is also experimenting with walk-up windows for order pickup and other enhancements that should drive further growth in Chipotle's digital sales, thereby boosting restaurant productivity.
As long as Chipotle's new menu items are well received, the company is likely to surpass its comp sales guidance in 2020. A second straight year of double-digit comp sales growth would be tough to achieve, but not impossible. If Chipotle can pull it off, the stock could continue to hit all-time highs. But in light of Chipotle's sky-high valuation, anything less than perfection could set the stage for a pullback.