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3 Takeaways From Chipotle's Earnings Report

By Pearl Wang – Jul 27, 2020 at 11:08AM

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Chipotle Mexican Grill is recovering from COVID-19 thanks to smart digital investments and new features in some stores.

Last week, Chipotle Mexican Grill (CMG 0.13%) reported second-quarter adjusted earnings per share of $0.40, above consensus estimates of $0.35. Revenue decreased by 4.8% at $1.4 billion, again beating the $1.3 billion consensus projection. While comparable sales declined by 9.8%, affected by the closures and slowdown from COVID-19, the restaurant group saw strength in its digital business and its Chipotlane drive-throughs.

The consumer discretionary company also provided more details on its continuing efforts to invest in new restaurant openings, as well as digital investments and new dining options (including cauliflower rice and organic beverages). Here are three other takeaways from the second-quarter earnings report.

The exterior of a Chipotle restaurant, at daytime.

Image source: Chipotle.

1. Digital was a standout

Digital revenue was strong in the quarter, with a 216.3% increase, and accounting for 60.7% of total revenue. This was a record quarterly high, helped by increased numbers of customers stuck at home, some targeted advertising, and new delivery partnerships with Uber Eats and GrubHub. Chipotle's continued investments in digital improvements are paying off.

CEO Brian Niccol commented on the earnings call that "recent digital investments such as Pepper, our concierge [bot] on Facebook Messenger, [along with] group ordering and complete customization are further optimizing a seamless ordering experience for our guests."

The digital sales strength continued even after Chipotle's in-house dining opened back up. Half of the digital orders are from order-ahead and pickup, while the remainder are from delivery. The quick-service restaurant's pickup business is growing faster, helped by no delivery fees. The company sees the pickup business growth as a positive, boosting margins and sales.

2. Revenue is recovering nicely, boosted by success of Chipotlanes

While comparable sales decreased by 9.8% during the quarter, each month saw a sequential improvement. April's comparable sales were down 24.4%, while May's rebounded to down just 7%. June actually saw a 2% increase for comparable sales. July comps are still improving, up 6.4% month to date as of July 22. The improvements were helped by a combination of reopening restaurants and new customers on the digital platform. They will probably continue as Chipotle works to reopen its 30 restaurants that are still closed.

Chipotle continues to open new restaurants, with 37 new locations opened during the second quarter. Twenty-one of these new restaurants have a Chipotlane. These drive-thru windows have been very popular, given their combination of contactless service and convenience. The Chipotlanes probably appeal to consumers who may be nervous about COVID-19 and prefer to have limited contact when buying food.

The Chipotle restaurants that have a drive-thru and were opened pre-COVID 19 outperformed their non-Chipotlane comparable restaurants by 10% in the same opening period. The Chipotlane restaurants that were open during COVID boasted sales that were 30% higher than comparables.

3. The balance sheet continues to be strong

The quick-service chain's balance sheet boasts $935 million in cash and equivalents, with no debt. Chipotle also has a $600 million credit facility available to be used to assist during the recent COVID-19 issues. CFO Jack Hartung commented on the earnings call that the company has "greater confidence in our potential to generate positive cash flow for the rest of this year, which will help support ongoing strategic investments."

Overall, Chipotle turned in a solid quarter, showing impressive performance in the midst of challenges around COVID-19 closures and the economic slowdown. Its strong execution with its digital investments and Chipotlanes should keep its revenue growing, and the company's strong balance sheet is a solid reason for investors to consider Chipotle.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Pearl Wang has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Facebook. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.

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