Please ensure Javascript is enabled for purposes of website accessibility

Chipotle Thrived During the Pandemic -- but Is It Now a Surefire Reopening Stock?

By Neil Patel – Aug 31, 2021 at 8:12AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Customer behavior is changing for the fast-casual leader. It'll have to show that it can adapt to those changes.

Chipotle Mexican Grill (CMG 0.82%) has done well during the pandemic, as the company leaned heavily on its digital capabilities to continue serving customers even when indoor dining was temporarily put on pause. The stock price represents this, up 50% over the past 12 months and significantly outperforming the broader market. 

All Chipotle locations are back open in some form, including for dine-in service, which has caused digital sales gains to meaningfully decelerate, growing just shy of 11% in the most recent quarter. But overall, Chipotle's quarterly revenue soared an impressive 39% year over year and 32% when compared to the second quarter of 2019. 

As we hopefully make progress against the pandemic, Chipotle has shown that it's still flourishing. Does that make this restaurant business a surefire reopening stock? 

A chipotle worker wearing baseball cap and a COVID-19 mask reaches for a bag of chips in a restaurant

Image source: Chipotle.

Lunch is driving in-store business 

In the year-ago quarter, sales via the digital channel more than tripled and accounted for 61% of total revenue. The company has been focusing on bolstering its technological infrastructure, introducing Chipotlanes (drive-thrus), and improving the rewards program, of which there are more than 23 million members today. These initiatives clearly paid off. In fact, being accessible to its customers, particularly when most of the restaurant industry was in turmoil last year, could have strengthened Chipotle's market position. 

CEO Brian Niccol highlighted the changing consumer behavior as pandemic restrictions have loosened. "We've continued to make operational adjustments to adapt to the constantly changing environment, which has led us to recovering about 70% of in-restaurant sales thus far, while retaining about 80% of digital sales," he revealed during the Q2 earnings call. And based on leadership's estimate, only 15% of people are using both channels, so sales cannibalization of each customer group appears to be minimal. 

For Chipotle to be a potential reopening play, this is very important for shareholders to pay attention to. Because there is little overlap between these groups, Chipotle customers who held off on eating there are now coming back. "The one thing that is driving some of the bounce back in our dining room business is, we are seeing more business at lunch," Niccol said. "And we're also seeing that lunch business occur Monday through Friday." 

And the digitally native customers may want to visit and eat inside. "I'm hoping they've had really positive experiences digitally that will suggest, hey, want to give Chipotle a try in the dining room," Niccol said. Obviously, new COVID-19 variants pose a near-term threat to Chipotle's dine-in business. But guess what? The company can go back to relying on its digital sales like it did in 2020. 

A Chipotle worker wearing sanitary gloves spoons guacamole onto a burrito bowl as icons for the company's ordering app are overlayed on the image

Image source: Chipotle.

This dynamic not only makes Chipotle a reopening stock, but a business that can do well no matter what the health or economic circumstances are. 

The valuation is steep 

I would, however, caution investors from scooping up shares in this fast-casual pioneer. Although the company's fundamentals are strong, it's trading at a pricey valuation today. Chipotle's forward price-to-earnings ratio stands at an elevated 75. There's some serious growth baked into that number, and investors would have to believe earnings will skyrocket to justify paying that price. 

For what it's worth, consensus Wall Street expectations call for earnings per share to increase more than 100% in 2021, 31% in 2022, and 24% in 2023. Additionally, management is planning to open at least 200 new stores by year-end, with a long-term target of 6,000 locations in North America, up from 2,853 today. Even so, I think the stock price has outpaced fundamentals. 

Chipotle looks like a reopening play, but think twice before buying its expensive shares.

Neil Patel 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chipotle Mexican Grill Stock Quote
Chipotle Mexican Grill
CMG
$1,527.56 (0.82%) $12.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.