On March 11, the World Health Organization declared COVID-19 a pandemic. This pandemic has ushered in a bear market that is decimating stocks. Among the hardest hit are those in the restaurant industry, and Chipotle Mexican Grill (NYSE:CMG) is no exception. The stock has lost more than one-third of its value in just one month.
Avoiding an investment in Chipotle may be a terrible long-term move. In fact, here are three reasons why you should consider buying Chipotle's stock, even in this current economic environment.
1. It's built for this adverse situation
Chipotle reported its 2019 results in early February before the market correction began, so management discussed issues unrelated to the current health crisis. One area of focus was digital ordering. In 2019, digital orders grew 90% from 2018 and, for the year, they comprised 18% of total sales. In the fourth quarter, digital orders were 20% of sales.
Digital orders are strongly slanted toward off-premise dining -- delivery and pickup. With delivery, Chipotle had already partnered with privately held DoorDash and Postmates. But with the recent coronavirus outbreak, Chipotle additionally partnered with Uber Eats, to help meet delivery demand. As restaurants close dining rooms around the country, those with strong existing delivery options stand to benefit. In fact, there's data that suggests Chipotle is actually one of a few restaurants growing sales right now.
I don't wish to imply that Chipotle will be unaffected by current quarantine and social distancing restrictions. It undoubtedly will report lower comparable sales in the coming quarters as the coronavirus outbreak keeps getting worse. However, while some dine-in restaurants could close their doors forever, Chipotle's digital off-premise business is strong enough to mitigate the current crisis and make it to the other side in better shape than most.
2. Strong unit economics and balance sheet
When you divide sales by locations, you arrive at a metric called "average unit volume" (AUV). This is an important metric in the restaurant industry and a key figure in understanding unit economics. Chipotle's AUV in 2019 grew to $2.2 million, among the very best in the business. Importantly, this is up sharply from $2 million AUV in 2018, thanks to comparable-sales growth of 11.1%.
Chipotle doesn't just do high volume; it's also highly profitable. Take labor as an example of controlled cost. Many restaurants struggled with labor costs in 2019. As the minimum wage goes up around the country, it's hard for companies to manage. However, in Chipotle's case, its labor as a percentage of sales improved in 2019. Labor was 26% of sales, compared to 27% in 2018. How does Chipotle do it? When AUV increases as it has, the company gains operating leverage. Existing labor churns out more revenue, and profitability goes up.
Strong revenue growth coupled with high profitability over the years has placed Chipotle in an enviable financial position. Certain stock screeners show that it carries long-term debt, but this is actually just long-term operating lease liabilities. In reality, it carries no debt and has around $880 million in cash and investments. That firm financial footing positions Chipotle to not only weather the current coronavirus storm but continue investing in growth in the future.
3. Still more growth ahead
That firm footing is good because Chipotle still has more growth opportunities ahead. Despite years of past growth, the company continues opening new locations -- and faster than ever. In the fourth quarter of 2019, it opened 80 new locations. It's never opened that many in a single quarter. And for the year it opened 140 new locations, bringing the total to over 2,600.
Of course, that's a lot of locations already. How much bigger can Chipotle get? The company hasn't provided a target number of locations for investors, but CEO Brian Niccol said in a 2018 press release that he envisions the company's sales easily growing to $10 billion. That's about 79% higher than 2019's $5.6 billion in sales.
More than likely, this will primarily come from new Chipotle locations, though it's worth noting the company is an investor in a pizza brand called Pizzeria Locale. Over the years, Chipotle has experimented with other restaurant concepts, only to abandon the projects. In 2018, the company closed a burger chain called Tasty Made, and shut down some Pizzeria Locale locations. However, remember it also closed under-performing Chipotle locations during its transitional time with new CEO Niccol, when it abandoned its other restaurant concepts. That was an extraordinary time, and in the future, it wouldn't be surprising to see Chipotle excel with a second brand.
All told, Chipotle is a restaurant company worth buying for the long haul. It will make it through the current global health pandemic with its financially sound business that's still poised for future growth.