Chipotle Just Had a Fantastic Quarter, but Investors May Want to Stay Away From the Stock

Chipotle Mexican Grill (CMG 0.53%) seems to be firing on all cylinders lately. With the incredible success of its digital apps and partnerships with delivery services, its sales have grown through the pandemic to record levels. But taking a look back to five years ago, at a time before its E. coli and norovirus outbreaks, we see some metrics that still have not recovered, even as the stock is near all-time highs. Motley Fool contributor Brian Withers covers the quarter's results on a Fool Live show recorded on Feb 4, along with Fool contributors Matthew Frankel and Brian Feroldi providing additional insights on the burrito maker.

Brian Withers: Yeah. I don't think Chipotle's results match up to PayPal's, but considering it's a restaurant and it's a pandemic, they were pretty darn good. Let me cover the highlights. The other thing that's interesting is now we're lapping, if you remember, the E. coli stuff is actually five years ago. So I have 22 quarters of results that we're going to buzz through and some charts and show you what life was like pre-COVID and pre-E. coli five years ago. The stock has tripled since then. But I don't think the results match up to where the stock has run.

Revenue increased 11.6% to $1.6 billion. Comparable restaurant sales, 5.7%. Five-point seven percent comparable restaurants sales in any economy, even non-pandemic times, it's enviable. My feeling is they are taking market share because they're open, because they have digital sales, which is now almost 50% of its total sales.

The only trouble is restaurant-level margins were flat to last quarter at about 19.5%. It's considerably down from where it was pre-E. coli, and we'll talk a little bit about that. They've had extra charges for dealing with coronavirus, sending people out sick. The delivery business is now about a quarter of all sales, and that's causing them some extra -- any delivery sale is about breakeven. It's good for the top-line sales of the restaurant, but it hurts margins, as well as they've seen a decrease in things like catering and drink sales, which are also high-margin things impacting margins a little bit. They're starting to play around with pricing to charge more for delivery orders and have seen a little resistance on that, but they're going to continue to do that.

The other thing that's pretty interesting is they're not sitting still. They're looking at brisket, they're looking at new menu items, and they have about 170 Chipotlanes, which are essentially drive-through restaurants where you'd digitally order and you can pick up your stuff. They're usually a hybrid; they're not a digital-only. And those restaurants see about 10% bump instead of 50% of sales, or about 60% of sales through those restaurants. The digital sales where an end consumer picks up the food is a much better margin for Chipotle. It takes less time to build the order, and they don't have to pay the delivery fees.

Let's take a quick look at the business over the last couple of years. This is going to be lightning-fast. Here we are. Let me start with revenue. Revenue is not bad. Everything starts with Q3 2015, and at the end of that Q3, it's like the last week of October, they had their first E. coli news. The news broke out. So it really didn't impact the Q3, but you can see the revenue dropped considerably in Q4 and then it bottomed out in Q1 later. It's doubled from its bottom to the latest quarter, but you really need to look at pre-E. coli times. It's only up about 30% in total quarterly revenue, where the stock has tripled.

Let's look at average restaurant sales. Average restaurant sales dropped down to [$1.87 million] and are up to 222 [$2.22 million], but it's still 12% below the average restaurant sales pre-E. coli times.

Digital revenue is a whole different deal, off the charts. They didn't start tracking that or releasing data until Q3 2016. It was in the single low digits before then, but you can see it popped up in the second quarter as most restaurants closed and whatnot. Today, they have about 60% of their restaurants open. The digital sales, they're still about stable at half.

This is the number of stores going from 1,931 up to 2,768. What's interesting in the last two quarters, even with the pandemic, they've added 100 stores, they're pressing on the gas, they're looking at doing 200 stores next year. Their long-term goal is 6,000, and they want to get the average restaurant sales back up to this number, $2.5 million. Same-store sales have been quirky, depending on the year's comps. The last two quarters have been super solid. Q2 was low. Actually, having all its restaurants closed for a period of time in Q2, and only losing 10% of sales is actually pretty amazing.

Here's where the rubber meets the road, though. This is store level. There's a lot to take in here. The store-level margins prior to when Chipotle was a Wall Street darling, this was their cost structure -- 72% of cost, which means that the restaurant level margins were an industry-leading 28%. As cost went up for food safety and whatnot, you can see the food went up, the blue bar when food went up. But recently, the last two quarters, these other costs have gone up, and that's really related to delivery charges, and that gets offset a little bit in the price, but they're going to have a hard time figuring out this labor cost is 25%; it's nowhere near the 22%.

They're going to be pressured for labor, and unless they can do more to pull in Chipotle lanes totaling 170 of their, how many are the stores, 2,700 stores. It's a really small portion. This labor business, when the stores open back up, it's going to be tough as well as, I think, in the restaurant industry in general, is going to struggle with rising labor cost. That's what I got.

Brian Feroldi: Can you just go back to that chart that showed the digital sales as a percentage of the total?

Withers: Yeah.

Feroldi: That's a great chart.

Withers: This is amazing.

Feroldi: The interesting question that I have is, I mean, obviously, look at the enormous spike, but pre-COVID it was 26%, or 20% depending on which quarter you're going to look at. But if you're going to say what behaviors are changing for humanity as of COVID, I think that 50% is probably pretty darn sustainable. If you put apps on your phone, it's just push a button, repeat order, done. It's so simple.

Withers: The interesting piece, they've talked about the Venn diagram of in-store eaters and order-on-the-app eaters were like this, and now it's going to come like this. They expect that 85% of their digital orders, they're going to keep those customers who are doing the digital order. The other thing that's going to happen is they're going to add back lunch. They didn't talk about the percentage of sales in the lunch window, but if you think about people working from home and whatnot, you're not going to get together with colleagues, "Hey, let's go to Chipotle for lunch." It just isn't happening.

There's some certainly some levers that are going to get better, like the drink sales and lunch sales, and people coming back in the restaurant for what they call occasions. But again, the stock tripled and the revenue went up 30%. Their margins are worse than they were prior to them five-years ago. I think it's going to be difficult for them to see the same 10-year stock performance that they've had continue that going forward.

Matthew Frankel: Brian, you remember we were saying a minute ago, remember when PayPal was a tiny part of eBay? You remember who Chipotle used to be a tiny part of?

Withers: McD's.

Frankel: McDonald's. Do you know how much McDonald's got rid of Chipotle for?

Withers: Oh, I can't remember.

Feroldi: Was like a couple hundred million?

Withers: Yeah.

Frankel: What's Chipotle share price right now?

Feroldi: It was $1,600, maybe.

Withers: Yeah.

Frankel: Sixteen hundred. McDonald's IP, it spun off Chipotle at $22 a share.

Withers: Twenty-two.

Frankel: In 2006.

Feroldi: Thanks, McD's. [laughs]