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Chipotle Earnings Preview: What to Watch on Wednesday

By Demitri Kalogeropoulos – Oct 19, 2020 at 7:25AM

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Investors have some big questions heading into this week's report.

Chipotle Mexican Grill (CMG 0.23%) is set to announce its third quarter results after the market closes on Wednesday, Oct. 21. The 60% surge in Chipotle's share price this year shows that investors have high expectations for this report, especially given that industry peers like McDonald's (MCD 0.58%) have stuck closer to the broader market's 8% year-to-date rally.

Let's look at the key metrics in Wednesday's report that might push Chipotle's market-beating gains deeper into 2020.

A burrito.

Image source: Getty Images.

Building on the rebound

The Tex-Mex chain announced plenty of encouraging news in its last quarterly update. Sure, comparable-store sales fell 10% for the period, which ran from April through June. But those declines were heavily tilted toward the pandemic-closure period at the beginning of the second quarter. Comps returned to positive territory in June after having dropped 7% in May and 24% in April, management said.

Chipotle likely built on that rebound over the following months, but it will be interesting to see how its results stack up against McDonald's. McDonald's recently previewed its third quarter earnings report by saying sales rose 4.6% in the period thanks to factors including its popular drive-thru network and its growing online ordering platform. Chipotle is pouring cash into each of these areas while continuing to open new restaurants. These positive factors have investors expecting double-digit sales growth for the quarter.

Cost factors

Chipotle no doubt endured extra costs associated with COVID-19 health and safety last quarter. Labor expenses are trending higher, too. These factors suggest operating margin will continue declining year over year.

But the bigger profitability questions heading into this report relate to the industry selling environment. McDonald's said it recently ramped up marketing and promotion spending in a bid to win back market share. Chipotle had several of its own limited time offers in the period, too, including free home delivery.

We'll find out on Tuesday whether those moves affected Chipotle's operating margin, which a year ago stood at 8.2%.

Looking forward

It would be a surprise if CEO Brian Niccol and his team reinstate a detailed growth outlook, given all the variables around COVID-19 outbreaks and economic growth rates. But executives might reveal monthly sales trends like they did in the Q2 report, and these figures would be just as helpful. As it stands heading into the report, investors are predicting sales growth of about 7% in 2020, with help coming from Chipotle's steadily growing store base.

If the chain can continue posting sales and profit metrics that keep it near the top of the industry, then Chipotle might have every reason to take advantage of weaker growth in the broader restaurant industry in 2021. It could accelerate store opening plans to take advantage of cheaper real estate, for example. The fast casual giant might also use its resources to pad its competitive advantages by adding more drive-thru access and further scaling up its delivery program.

On the other hand, a stubborn recession -- even if it's mostly confined to the restaurant industry -- might depress sales growth and earnings potential well into 2021. Chipotle won't be able to offer firm guidance on Wednesday about which of those scenarios will play out in the next year or so. But it is likely to report growth metrics that support its billing as a top performer in the restaurant industry.

Demitri Kalogeropoulos owns shares of Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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