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3 Reasons Why Chipotle's Q1 Earnings Report Was a Success

By Parkev Tatevosian - Apr 29, 2021 at 11:09AM

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The restaurant chain is poised to grow sales as the risk of contracting COVID-19 fades.

Chipotle Mexican Grill (CMG -1.81%) reported first-quarter earnings on April 21. The fast-casual eatery is benefiting as millions of Americans are getting vaccinated against the coronavirus and feeling comfortable leaving their homes. 

Although Chipotle's digital sales are thriving during the pandemic, the company prefers customers to dine inside, as they are more likely to order high-margin drinks and so that Chipotle does not have to pay to fulfill orders for delivery. Given that the vast majority of its restaurants are in the U.S., where states are easing restrictions on dining inside, Chipotle may begin a string of quarters with double-digit percentage revenue growth and increasing profit margins. 

Let's take a look at three reasons why its first quarter was a success. 

A burrito bowl.

Image source: Getty Images.

Less fear of dining at restaurants is fueling Chipotle's rebound

First, Chipotle reported comparable-store sales growth of 17.2% for the first quarter. The metric, which excludes the impact of new store openings and closings, is important in measuring customer demand at the store level. Now that states are easing restrictions on eating inside at restaurants, Chipotle can supplement the robust growth in digital sales with revenue at the restaurants themselves. In fact, 92% of Chipotle restaurants now offer dining inside the restaurant -- with capacity restrictions in most locations.

Second, operating margin expanded year over year and quarter over quarter. Restaurant-level operating margin, which includes total revenue less direct restaurant operating costs, increased by 470 basis points to reach 22.3% in the most recent quarter. That figure is poised to expand as more people choose to dine in rather than order for delivery. That's because customers who dine inside order more of the higher-margin drinks.

Third, Chipotle instituted menu price increases in the most recent quarter, and customers didn't reduce spending. Price increases are coming just in time to meet with rising consumer demand. A portion of its customer set is flush with excess savings after receiving stimulus checks. That robust customer interest led Chipotle to guide investors to expect second-quarter comp sales growth of at least 20%.

What this could mean for shareholders  

It appears as though Chipotle has made it through the most challenging part of the pandemic. States are easing restrictions, and all of the U.S. adult population is now eligible for a shot in the arm to protect against COVID-19. What's more, Chipotle built out a digital sales channel that now makes up 50% of overall sales. Even in the aftermath of the pandemic, some people will still prefer to order online -- either for delivery or for pickup. 

In addition to rising comp sales, Chipotle is on a path to have over 6,000 restaurants. That's more than double its current total of 2,800. This year, it plans to add about 200 new locations. Together, new locations plus increasing comps could fuel revenue growth over several years.

Chipotle is a growing restaurant stock that's coming out of the pandemic with a better business, and investors should consider adding its stock to their watch lists. Admittedly, the stock is not cheap -- trading at 61 times fiscal year 2021 projected earnings. If you're concerned about paying too much, you may want to wait for a pullback in share price before starting or adding to your position in Chipotle.

 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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Chipotle Mexican Grill, Inc. Stock Quote
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CMG
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