Chipotle (NYSE:CMG) recently posted solid Q3 operating results as it bounced right back to steady growth following pandemic shutdowns earlier in the year. The restaurant chain reported a continued surge in its digital business that more than offset an ongoing slump in in-store traffic.
Chipotle's financial update also contained some worrying signs for returns over the short term as the wider industry struggles with high costs and a heavily promotional selling environment.
In a conference call with Wall Street analysts, CEO Brian Niccol and his team broke down those hits and misses while adding some context to the burrito maker's cloudy growth outlook.
Below are a few highlights from that presentation.
Big shifts in sales channels
Since sales troughed in late March, we've been able to retain 80% to 85% of our digital sales gains while recovering 50% to 55% of our in-store sales. The stickiness of digital is a key factor in allowing us to deliver strong results.
Chipotle's results showed a steady recovery as sales trends improved in July and August after returning to positive territory in June. April represented the chain's worst month, with revenue slumping 24%. Trends slowed slightly in September, executives said, but mainly due to a tough comparison with a prior-year period that included a popular sales promotion.
There were big swings within the wider quarter's 8% increase, too. Management said Chipotle's digital sales, which include delivery and pick-up orders, jumped 200%. That surge translates into steady e-commerce demand even as in-store traffic remains lower by about 50% thanks to social-distancing efforts. Overall, executives were happy with the rebound trends.
About those costs
Delivery expenses were elevated year over year given the significant growth we've experienced in our digital business, a trend we expect to continue.
-- CFO John Hartung
Chipotle posted higher costs in several areas, including marketing. It's fighting with companies like McDonald's that had depressed advertising spending in the first half of the year during COVID-19 shutdowns but resumed aggressive promotions in Q3. Margins were also hurt by the shift toward those more expensive digital deliveries.
Investors might see more pressure from this channel over the next few quarters given management is happy to take a short-term earnings hit for the chance at winning more loyal customers. But Chipotle is also testing modest price increases aimed at reducing the profitability pinch from the delivery segment.
New store openings
We're delighted to have opened 44 new restaurants with 26 including a Chipotlane. We now have a total of 128 Chipotlanes, including five conversions. And performance for these formats continues to be stellar.
Chipotle's expansion plans left little doubt that management is optimistic about its growth potential through the rest of the pandemic -- and beyond. The company is especially excited about the digital segment, its new loyalty program, and drive-thru lanes, which are producing a meaningful sales boost across the board.
COVID-19 might temporarily keep new store openings to under 200 again in 2021. But Niccol and his team believe they'll be in a much better position to estimate that, as well as next year's sales and profit trends, when the company reports Q4 results in early February.