Chipotle Mexican Grill (NYSE:CMG) 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?
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.
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.