Where Will Chipotle Be in 5 Years?

One of the major ways COVID-19 is impacting businesses is the momentum it's adding to their moves toward digital and omnichannel strategies. One example of this shift is Chipotle Mexican Grill (CMG 0.53%), which accelerated its digital investments after the pandemic hit, closing thousands of its in-store dining rooms. In response, the chain's digital sales grew 216% year over year in the second quarter to make up over 60% of the top line.

Revenue still decreased 5% as comparable-restaurant sales fell 10% during the quarter, but the popular chain is continuing to open new restaurants and focus on growth. Let's take a look at where the company is headed.

A new take on fast food

Chipotle was arguably the pioneer of the fast-casual restaurant trend that sought to offer a higher-end experience with a focus on better quality ingredients. This concept clearly resonates with consumers who have increased their demand for healthier dining options year after year, and Chipotle's sales have grown accordingly.

Data Source: Chipotle quarterly reports. Growth reported as year over year.

Beyond its food, Chipotle is finding ways to connect with customers through new initiatives like its rewards program, growing its bottom line with lean margins and well-run operations in the process. As of the end of the second quarter, the company had $935 million in cash and cash equivalents on its books and no debt.

Image source: Getty Images.

The company has an impressive operation that relies heavily on digital options such as pickup and group ordering, which it recently launched as part of its overall digital acceleration. In the second quarter, 61% of sales came through digital channels, but since dining rooms have reopened, digital has dialed back to about half of all orders, with those split almost evenly between pickup and delivery. Comps improved from April to May and from May to June when they were up 2% year over year. And in July, they strengthened further to 6.4% growth as of the July 22 earnings call.

Making many moves

Chipotle has been emphasizing digital channels as a growth driver for some time. Even before the pandemic, that channel accounted for a large share of its growth and sales. CEO Brian Niccol explained that the digital adoption tend to be sticky, and even though dining rooms have reopened, digital orders are still 70% to 80% of what they were when dine-in wasn't an option.

To capitalize on this trend, the company established partnerships with Grubhub and Uber Eats to help it deliver food to more people, and it began offering delivery in Canada. It also started a rewards program in 2019 that attracted 15 million members in 15 months. 

Chipotle expects to make more investments that will put pressure on margins in the third quarter, but that will help it produce greater sales and profitability down the road. For example, in the second quarter, it opened 37 new restaurants, 21 of which feature drive-thrus, or Chipotlanes. Restaurants with this feature have higher sales and better margins. Chipotle is planning to include Chipotlanes in 60% of the new restaurants it opens in 2020 and over 70% in 2021. 

Niccol noted that there are now more premium real estate spaces available since so many smaller restaurants have closed during the COVID-19 recession. Chipotle will take advantage of this to develop new stores. The burrito chain had over 2,650 locations as of June 30, and Niccol has stated more than once that he expects to double the number of U.S. stores. The company also has restaurants in the U.K., Canada, France, and Germany.

Where the stock is going

Shares of Chipotle are up 53% year to date as of this writing, extending the rally that has seen the stock gain over 300% in the past three years. The trailing price-to-earnings ratio is a sky-high 141, which would be considered excessive by most traditional measures.

However, that premium shows us just how confident investors are in the company's future. Short term, the company is likely to outperform the industry overall as COVID-19 restrictions ease, allowing more dining rooms to reopen. And five years from now, between new locations, new order fulfillment methods, and new ways to connect with diners, there is still plenty of room for the company to grow.