Chipotle (CMG 1.01%) adjusted well at the onset of the pandemic. It quickly emphasized digital orders for pickup and delivery. As a result, digital sales have held down the fort while dining inside its restaurants has lagged.
However, that will likely change when the company reports second-quarter results on July 20. The quarter included a massive vaccination campaign and an easing of coronavirus-related restrictions on restaurants. That being said, the momentum from reopening economies will be balanced by rising costs. A combination of surging demand and supply shortages is causing prices to rise on everything from labor to commodities.
Chipotle's stock is up by more than 15% in the last month. Image source: Getty Images.
Prices are going up
Several months ago, Chipotle started raising menu prices to help offset the impacts of rising costs. If it can report solid revenue growth in the quarter despite the price increases, it could be a powerful signal to investors. Management can be commended for announcing menu price increases in conjunction with announcing wage increases for its employees.
In the hours and days following the announcement, social media sites were abuzz with customers saying they would be glad to pay a few cents more for a burrito if it meant employees could earn a living wage. Of course, consumers' willingness to accept price increases also has a lot to do with receiving several rounds of stimulus checks that make them feel wealthier.
As vaccinations have gained steam and economies have reopened, folks are going out more often. That trend is likely to help Chipotle and will be reflected in its earnings results. Sales to customers who dine in are more profitable to Chipotle compared to orders for delivery. Even more so, when you consider that folks order higher-margin drinks when away from home.
Indeed, Chipotle is expecting a surge in customers and is going on a hiring spree to make sure it can meet the demand with timely service. Just because it is looking to hire does not mean it will, though. Many companies are reporting they are having a difficult time hiring staff. And although Chipotle has increased wages of late, it will still have difficulty filling roles.
What this could mean for investors
Analysts on Wall Street expect Chipotle to report revenue of $1.88 billion and earnings per share of $6.50. If Chipotle can meet revenue estimates, it would be an increase of 40.7% from the same quarter last year.
Moreover, this quarter will be the first where Chipotle will highlight its ability to supplement high levels of digital orders with sales to customers dining in its restaurants. That prospect has investors excited about Chipotle's stock, up by 18% in the last month. The optimism could be a little early as the company has yet to report results that warrant the enthusiasm.
Investors interested in starting a position in Chipotle are better served waiting for second-quarter results to be announced before deciding on the stock. Chipotle is an excellent company with good long-term prospects, but that could already be priced into the stock trading at a forward price-to-earnings ratio of 65.86. That makes the stock prone to the risk of falling if it delivers less than stellar earnings results when it next reports.
