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.
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.