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Why Chipotle Stock Was on Fire Today

By Jeremy Bowman – Apr 22, 2020 at 2:46PM

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Shares of the burrito roller surged on a strong earnings report.

What happened

Shares of Chipotle Mexican Grill (CMG 1.65%) were soaring today after the company delivered a first-quarter earnings report that calmed investors and convinced them that the burrito chain would not only survive the pandemic, but come out even stronger on the other side. Despite the beginning of lockdowns in March, which directly impacted the company, Chipotle still reported growth in revenue and comparable sales, and only a modest decline in earnings per share for the quarter, though that was helped by a tax benefit. The company also said it had enough cash to survive more than a year under a worst-case scenario from the pandemic.

As a result, the stock was up 12.1% as of 1:52 p.m. EDT. 

A Chipotle burrito with a side of guacamole

Image source: Chipotle.

So what

Revenue in the quarter rose 7.8% to $1.41 billion, and comparable sales ticked up 3.3%. Through the end of February, comps had jumped 14.4%, showing that the brand was resonating strongly with customers before business was derailed by the coronavirus outbreak. Comparable sales fell 16% in March as the company was forced to close dining rooms and about 100 stores, mostly in shopping malls and Europe.  

However, Chipotle's investments in its digital channel and its decision to offer free delivery starting in mid-March paid off as digital sales in the quarter jumped 80.8% and made up 26.3% of total sales in the quarter. 

Nonetheless, COVID-19 clearly impacted profit margins as restaurant-level operating margin fell from 21% to 17.6% in the period and operating income declined 35% to $71.1 million. However, with the help of a tax benefit, adjusted earnings per share only declined from $3.40 to $3.08.

Now what

Not surprisingly, management pulled its guidance for the year as the virus has made forecasting for restaurants and other businesses virtually impossible. Weekly comparable sales hit a bottom at negative 35% in the week ended March 29, and recovered to down by high teens last week (adjusting for Easter), which management viewed as a positive sign and a trend that could continue. On the earnings call, CFO Jack Hartung said that restaurants would operate at break-even even if comps fell by 30% to 35%, though the company still planned to spend $50 million to $60 million a month on capital expenditures and overhead costs. With comps down in the high teens, restaurants would generate about $20 million in cash flow per month, meaning the company would still be burning about $30 million to $40 million with its current capital expenditure plans.

Chipotle has no debt on its balance sheet and finished the quarter with $909 million in cash and short-term investments, putting it in a much better position than other restaurant stocks, and investors should be confident that the company can endure an extended impact from the crisis. Though profits will take a hit this year, Chipotle remains a good shape for the long term, which was enough to lift the stock today.

Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
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