Chipotle Mexican Grill (CMG 0.05%) came into its second-quarter earnings report with high expectations after the stock climbed 32% since its last earnings report. The burrito roller did not disappoint.
Chipotle breezed past expectations during the height of the pandemic and even returned to growth toward the end of the quarter. Let's take a look at the headline numbers that were reported on July 22:
- Revenue declined 4.8% to $1.36 billion as the company dealt with shutdown orders in the beginning of the quarter and store closures in places like malls and shopping centers, but that result beat estimates at $1.32 billion
- Comparable sales fell 9.8%
- Adjusted earnings per share declined 90% from $3.99 to $0.40, but topped expectations of $0.19
Investors expected a challenging quarter given the headwinds in the restaurant industry and restrictions on indoor dining. The United States Census Bureau said that sales at restaurants and bars fell 38.8% in the second quarter, and considering the collapse in the broader restaurant industry, it's clear that Chipotle is outperforming the industry and executing well during a difficult situation. The company's performance also rebounded strongly as the quarter progressed as comparable sales improved rapidly through the quarter.
- April comparable sales: negative 24.4%
- May comparable sales: negative 7%
- June comparable sales: positive 2%
Let's take a look at some other key figures that show Chipotle's recent performance and trajectory.
1. Comparable sales in July up 6.4%
July comps thus far have jumped 6.4%, showing that the company has fully returned to growth, and the jump in comparable sales comes after an 11% gain in the third quarter a year ago. New delivery partnerships with businesses like Uber Technologies and Grubhub and an increase in "Chipotlanes" (the company's new drive-thru concept), investment in its digital interfaces, and more restaurants offering indoor dining are all helping to drive sales growth at a time when most restaurants are still struggling.
2. Digital sales up 216% in Q2
Digital sales saved Chipotle in the second quarter as the company's investment in its app and digital make lines paid off handsomely. Digital sales more than tripled in the quarter, jumping 216%, and made up $829.3 million in revenue in the quarter, or 60.7% of total sales. The closure of indoor dining at its restaurants for much of the quarter and fears about the coronavirus led orders to move online, and a free delivery offer at the beginning of the quarter and partnerships with new delivery apps also helped boost online sales.
Even in July, as most of its dining rooms have reopened, the company is still seeing close to half of its sales come through the digital channel. The company is also seeing faster growth in the order-ahead channel, which involves customers picking up orders and is more profitable than delivery. Compared to pre-COVID levels, order-ahead sales were up 140%, compared to a 125% jump in delivery and a 37% drop in in-store ordering.
Management also said on the earnings call that digital sales helped drive membership in its rewards program as the rate of enrollment doubled in the quarter, and its rewards program is leading to increased use of its app, instead of third-party delivery apps, which also improves profitability.
3. Chipotlanes featured in 60% of new restaurants in 2020
One of the company's best new ideas recently has been the addition of Chipotlanes. Traditionally, management was opposed to drive-thrus as it believed the ordering process to be too complicated to work with a drive-thru, but digital ordering has unlocked the potential of the drive-thru and the company is now betting big on the new store design. It said that 60% of new restaurants opened this year would have Chipotlanes, and 70% of new openings next year would include the drive-thru option.
Sales at restaurants with Chipotlanes outperformed others in the comp base by 10% during the pandemic, and at new locations with Chipotlanes, sales growth was 30% higher than at its non-Chipotlane restaurants.
The company was also bullish on expansion opportunities, saying it expected to more than double its store base over the long term, and planned to accelerate store openings in 2021, as the company was benefiting from less competition for high-quality real estate sites.
Chipotle has bounced back impressively from the depths of the crisis and is now on pace to deliver solid growth in the third quarter even as coronavirus cases spike in the U.S. Beyond investments in digital, delivery, and Chipotlanes, the company is continuing to push forward with menu innovation, making quesadillas available through digital ordering, testing cauliflower rice, and adding a new line of beverages including organic lemonades, agua frescas, and teas. Meanwhile, new products like carne asada and queso blanco have also been hits.
Chipotle's valuation has soared during the crisis as the stock has rallied to all-time highs and profits have been temporarily squeezed. However, the company's future looks as bright as ever considering the momentum in the recovery, the lack of competition, and management's execution in areas like digital, delivery, Chipotlanes, and new menu items. Despite the challenges from COVID-19, this was a flawless quarter for the burrito chain.