Chipotle Mexican Grill (NYSE:CMG) did it again.
The burrito specialist delivered another blockbuster quarter, showing investors once more that the company has emerged from the COVID-19 crisis with serious momentum, passing the pandemic test with flying colors.
Against the lockdown-impacted second quarter of 2020, Chipotle posted comparable sales growth of 31.2%, or 18% growth on a two-year basis, and overall revenue jumped 38.7% to $1.89 billion, essentially matching the analyst consensus at $1.88 billion. Restaurant-level operating margin reached 24.5%, its highest level since sales swooned following the 2015 E. coli outbreak, and adjusted earnings per share soared to a quarterly record of $7.46, easily besting estimates for $6.49 in EPS.
Guidance was also impressive. For the third quarter, its seasonally strongest, management expects comparable sales to jump by low- to mid-double-digit percentages, leading to two-year comparable-sales growth of 19%-25%. Chipotle didn't provide bottom-line guidance, but based on that forecast, EPS will almost certainly beat the current analyst view at $6.29.
Not surprisingly, the stock jumped double-digit percentages to a new all-time high, as the report was essentially flawless. CEO Brian Niccol said the company took a significant step toward its goal of achieving $3 million average unit volumes, or average annual sales per store.
However, there was one especially important figure that shows how much the business has evolved since the pandemic started.
Digital sales are still soaring
Chipotle's share prices have quadrupled from their pandemic-era bottom largely because of the strength of its digital operations. The company wisely offered free delivery during the lockdown period, helping to keep business flowing and establishing a digital ordering habit with its customers. It's also accelerated the rollout of its drive-thru concept, Chipotlanes, which takes advantage of its digital platform. During the pandemic, more than half of its orders have come from digital channels, including its own website and app and those of third-party delivery partners like DoorDash.
In the second quarter, digital sales made up 48.5% of revenue, but what was particularly remarkable was that sales in the digital channel increased 10.5%. This is during a period when vaccinations opened up to all Americans, and the economy began to reopen as people returned to doing pre-pandemic activities like eating in restaurants.
That, however, wasn't enough to stop Chipotle's momentum in the digital channel even as it lapped the free delivery promotion from a year ago. Management also noted that slightly more than half of its digital sales were "order ahead," meaning that they were for pickup rather than delivery. That's important because pickup orders carry higher margins than delivery.
Why digital success is key
Because of delivery costs, digital sales aren't necessarily higher margin, but Chipotle has said before that digital pickup orders are its highest-margin transaction type, beating even in-store orders. That means it's in the company's best interest to push those sales as much as possible. Not only will they grow profits the fastest, but they also add other benefits. They give the staff flexibility on timing so they don't have to rush through a long line of lunch orders as people walk in the door. Digital pickup orders encourage customers to join and take advantage of its rewards program, thus increasing customer loyalty, and also encourage customers to eat their food off-premises, which requires less space and cleaning in the dining room. Over the long term, if the company finds that a significant percentage of its orders are consumed off-premises, it may choose to open locations with smaller dining rooms, saving money on real estate.
The success of the digital channel is already having an impact on the bottom line. On the first-quarter earnings call, Niccol had said that Chipotle's long-term goal was to delivery average unit volumes (AUV) above $2.5 million and restaurant-level operating margin above 25%. In the second quarter, it nearly eclipsed those marks, with a 24.5% restaurant-level operating margin and an AUV of $2.47 million.
The second-quarter report also shows how the increasing leverage from digital sales can quickly lead to soaring profits, as the $7.46 in adjusted EPS smashed the Q1 record of $5.36. While this restaurant stock is expensive, analysts are likely to hike their EPS estimates considerably following the Q2 report. That's further evidence that the fast-casual star deserves to trade at a premium.