Chipotle Mexican Grill (NYSE:CMG) has found massive success by adhering to the basic strategy of serving real ingredients with a simple menu. It's clearly working, as the Tex-Mex chain has quickly become one of the best restaurant stocks to own in recent memory, more than tripling the S&P 500's gain over the last five years.
Based on its recently released Q2 results, the company appears to have strengthened its competitive positioning as a result of the pandemic, with strong momentum still present. In a sign of shareholder optimism, the stock popped nearly 12% in the trading session following the announcement of yet another fantastic quarter.
Let's find out if the stock makes for a good investment.
Q2 recap: Digital gains are here to stay
Revenue jumped an impressive 38.7% in Q2 2021 versus the prior-year period to reach $1.9 billion. Although this was based on an easy comparison (spring 2020 saw the height of lockdown measures), Chipotle hasn't registered gains like this in at least a decade. Additionally, same-store sales (or comps) shot up 31.2%, which is phenomenal for a business that already has 2,853 locations.
While most other restaurants struggled just to survive over the past 16 months, it appears as though the coronavirus pandemic boosted Chipotle's prospects, putting it through a stress test that the business was definitely ready for.
Even before 2020, Chipotle focused on bolstering its digital capabilities to serve its customers better. In Q2, orders via digital channels, including the company website, mobile app, and third-party delivery services, accounted for nearly half of total sales. And the rewards program now has 23 million members. As a result, Chipotle was able to connect with its customers even as indoor dining was restricted.
The company opened 56 new stores during the quarter, and 45 of them included a drive-thru. Management highlighted that these so-called Chipotlanes actually increase new restaurants' sales, margins, and returns. Chipotle is on track to open roughly 200 stores this year, with 70% being built with a Chipotlane.
As dining rooms begin filling back up, it's only natural that the success of digital channels over the past few quarters will slow down. But according to CEO Brian Niccol, the risk of cannibalizing its customers is low.
"We hung on to about 80% of our digital sales and we're seeing about 70% of our dining room sales recaptured of where we were pre-COVID. And what we're seeing is the overlap is still in that 15% plus range, people doing both channels," he said on the earnings call. Chipotle is seeing an uptick in dine-in lunch customers as people return to offices, but it's also apparent that much of the digital business it acquired during the pandemic is sticking.
It's safe to say that Chipotle is firing on all cylinders. As a result, the company's competitive advantages have only strengthened.
What about the stock?
The fundamentals of the business are rock solid, but that doesn't necessarily make for a great investment. Chipotle's stock currently trades at 88 times the last 12 months' earnings, which is a steep price to pay, even for such an outstanding business.
The CEO's higher long-term financial targets, revealed at a recent conference, still don't justify the current stock price. If Chipotle reaches its goal of 6,000 stores in a decade, which is a very aggressive pace of openings, each generating $3.5 million in annual sales ($2.4 million currently), the stock will still most likely produce subpar returns.
In my opinion, the stock is priced for perfection. There is no margin of safety for those daring enough to buy shares today. That's not a buy in my book.