Please ensure Javascript is enabled for purposes of website accessibility

Chipotle Just Showed Its Pandemic Boost Is Going to Stick

By Jeremy Bowman - Apr 26, 2021 at 8:58AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company's digital transformation will have lasting effects.

When the pandemic first hit, restaurant stocks like Chipotle Mexican Grill (CMG -0.04%) plunged.

Stay-at-home orders and social distancing protocols were clearly a problem for the industry, which relies on customers eating together in close quarters. Chipotle, which gets a significant portion of its business from the lunchtime work crowd, figured to be a big loser, and its stock spiraled more than 50% during the market crash last March. Comparable sales plunged as well during the height of the crisis. Last March, comps tumbled 16% and fell another 24% in April, but as the lockdowns lifted, Chipotle customers began to come back with the help of the company's new digital platform.

By June, comparable sales growth had returned as customers simply shifted their ordering habits to the digital channel, taking their burritos home. Chipotle's first-quarter report makes clear that the pandemic has actually been a tailwind for the company as its business was well positioned for a boom in digital sales, but there are reasons to be excited about the economic reopening as well. Let's take a look at the first-quarter results first.  

A Chipotle burrito with chips and guacamole.

Image source: Chipotle.

The big numbers

Chipotle's first-quarter numbers showed that the business is on fire, executing across the board. Comparable sales jumped 17.2% and two-year comps were up 21%, boosted by two rounds of stimulus checks and new menu items like quesadillas. Overall revenue was up 23.4% to $1.74 billion, matching estimates, and restaurant-level operating margins jumped 470 basis points to 22.3%, benefiting from higher prices, better margins in digital and delivery, and operating leverage. Digital sales were up 134%, making up half of total revenue, and adjusted earnings per share jumped 74% to $5.36, a record for the company and the first time it topped its biggest quarterly profit from before the E. coli crisis.

In other words, Chipotle is as strong as it's ever been, even in the midst of a global health crisis that has put significant pressure on its dine-in business. Management expects its momentum to continue in the second quarter, saying April is off to a good start. The company said on the earnings call that it's targeting high-20% to 30% comparable sales growth for the second quarter, which would represent two-year comp growth of 15% to 17% as it laps the worst of the pandemic.

Why the pandemic boost will last

Chipotle has evolved during the pandemic and now looks like a hybrid of a digital and dine-in concept, rather than its previous model that required customers to order in its stores just a few years ago. The aggressive expansion of its Chipotlane drive-thru has also helped make digital ordering more attractive and boost margins.

Customers have now become accustomed to ordering through the app or online, and Chipotle's loyalty program only helps reinforce that relationship. Most importantly, management is optimistic that it can keep those digital orders while rebuilding its dine-in base. The company has so far recovered 60% of its lost in-restaurant sales even as digital sales are still at their peak. Since customers are now in the habit of ordering both online and in restaurants, that could increase order frequency from Chipotle's best customers. Its 21-million-strong loyalty program will also help.

Is it a buy?

Wall Street roundly applauded the earnings report and Chipotle shares are now up nearly 300% from their depths early on in the pandemic. The stock is expensive by almost every conventional metric. Based on the analyst consensus of earnings per share of $31.12 in 2022, Chipotle still trades at a P/E of 50, making it significantly more expensive than other restaurant growth stocks like Starbucks and Domino's.

With the explosion of its digital channel and the rapid growth of Chipotlanes as well as new menu items like quesadillas, Chipotle seems to have the biggest opportunity of the bunch, especially as it still has less than 3,000 restaurants globally and should get momentum from the return of dine-in customers.

At a share price around $1,500, Chipotle is priced for perfection, but its execution during the pandemic has been flawless. With momentum from its loyalty program, digital and dine-in channels, Chipotlanes, and the broader reopening, the future looks as bright as ever for the burrito roller.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,306.80 (-0.04%) $0.46
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$79.26 (3.76%) $2.87
Domino's Pizza Group plc Stock Quote
Domino's Pizza Group plc
DOM
$269.60 (-1.10%) $-3.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.