Shareholders in Chipotle Mexican Grill (NYSE:CMG) are cheering first-quarter 2020 results. The economic lockdown to halt the spread of coronavirus certainly took a toll, and the worst is still to come (likely in the current quarter, which gets reported in another three months). But it could have been far worse.
The chain launched its online ordering tool for pickup and delivery back in 2018, and the merits of doing so showed up in a big way. Digital sales grew 81% in the period, the majority of that jump occurring in March as the economy started to close down. As a result, digital was 26% of total revenue.
I'm not a buyer right now, with the stock already homing back in on all-time highs and trading for 64 times trailing-12-month free cash flow. That's a clear sign investors are betting that business normalizes again in the near future.
Nevertheless, the results demonstrate the merits of digital ordering and delivery, especially in a world that will likely remember the coronavirus for a long time.
Some numbers for context
Chipotle's total revenue increased 8% in Q1, driven by a 3.3% increase in comparable-store sales and its year-over-year restaurant count increasing by 134 to reach 2,638. Owing to foot traffic still rebounding after the last foodborne illness scare back in 2018, Chipotle said comps were up 14.4% through the end of February.
Given the final read of 3.3% comps growth, the month of March was indeed an ugly one. Comps fell 16% during the month; the week ended March 29 was the worst period, with a 35% year-over-year decline. The rebound in comps since 2018 is over and is going to get reset once again.
But Chipotle is faring far better than the average restaurant. Only about 100 locations are completely closed right now, since the company has made a hard pivot to its digital platform. As social distancing was progressively implemented, that platform also grew in importance. Management said that digital increased 103% in March and reached 38% of total sales. Again, since more widespread shelter-in-place orders didn't go into effect until the middle of the month, much of that increase came during the last two weeks of the quarter.
To illustrate just how bad it's gotten out there (and how well Chipotle is doing in comparison), researcher Black Box Intelligence reported that Q1 2020 comps for the restaurant industry overall were down 8.6%, including a 28% drubbing in March alone. Comps were down 67% nationwide in the week ending March 29. Chipotle in a bad quarter is thus pretty darn good in comparison.
Time to rethink digital and delivery?
Many restaurants have been dragging their feet on digital and delivery. For some, already thin profit margins meant that making that kind of investment (or allowing a delivery service to take an additional cut) was out of the question.
But digital is more than a business diversifier to access new consumers. In the last month, it's been the difference between surviving and not. Early indications are that this crisis will take time to recover from, and behavior is likely to be altered. Restaurant delivery and digital ordering, once viewed as a niche, can no longer be seen as such.
But back to Chipotle. The company is in an enviable position with its well-established digital platform already in place, and $881 million in cash and investments and zero debt on the books at quarter-end. I personally may not be comfortable with the current valuation, but it does reflect that Chipotle is one of the strongest restaurant stocks around. Others in the sector that made an early move on digital will likely report similar better-than-average results.