Chipotle Mexican Grill (CMG +0.30%) has been a major beneficiary of strict lockdowns during the pandemic, growing sales at a double-digit pace in each of the last five quarters. While most of the restaurant industry struggled just to survive when temporary lockdowns shut off in-house dining, this fast-casual Tex-Mex chain was able to keep operating thanks to its digital infrastructure.
The business reports its 2021 fourth-quarter financial results on Tuesday, Feb. 8, and I'll be paying close attention to the ongoing success of Chipotle's digital platform, especially with restaurants across the country reopened and consumer behavior normalizing.
Let's take a closer look.
Image source: Getty Images.
Why are digital sales so important?
During the third quarter of 2021, revenue via the digital channel -- which includes orders from the company website, mobile app, and third-party delivery services -- grew 8.6% year over year and now represents 42.8% of overall sales. While this is down meaningfully from the second quarter of 2020, when it was 60.7% of revenue, it's much greater than the 18.2% share registered in the second quarter of 2019.
Digital revenue generates a higher margin for this top restaurant stock, and this leads to higher profits. That's because it doesn't rely as much on the company's comparatively more expensive store-level costs to serve customers. The drive-thru option, known as a Chipotlane, has been a boon for the business as well. New locations equipped with these produce better sales, margins, and returns.
Having more loyalty-program customers will boost digital revenue. As of Sept. 30, 2021, Chipotle counted 24.5 million rewards members. This is remarkable given that the program was launched in March 2019. Many of these customers are new to the brand, and they provide Chipotle with an extremely valuable channel to communicate and drive engagement. Seeing this number grow in the upcoming earnings report will obviously be a wonderful sign.
And perhaps most important, at least over the past couple of years, is the flexibility that Chipotle's digital foundation adds to its operations. It allows the company to service customers in ways most convenient for them. Compared to a more traditional restaurant, which almost certainly has no loyalty program, Chipotle's tech infrastructure reduces friction and makes it top of mind for hungry consumers.
Increasing dining occasions
As the country slowly gets back to some level of normalcy, investors should keep an eye on how digital sales and in-store revenue coexist. Now that all 2,855 of Chipotle's U.S. locations are open, will digital revenue fall off?
"Currently, about 65% of our guests use in-restaurant as their main access point, nearly 20% use digital as their primary channel, and the remaining 15% to 20% use both channels," CEO Brian Niccol said on the third-quarter earnings call.
Because there is minimal sales overlap between the two channels right now, we can view Chipotle essentially as two distinct businesses: one for digital orders and one for in-person dining. Niccol said, "The thing I love about having two separate businesses is that they serve different needs that will likely prove to be incremental and complementary over the long run."
During the earnings call next week, pay attention to any commentary about the sales mix. Investors will want to see stability in digital revenue. And converting restaurant-goers into digital users over time should drive higher margins and profitability for the company, and ultimately a higher stock price.
Even though Chipotle's business appears to be firing on all cylinders, I think the stock is too expensive today, trading for a price-to-earnings ratio of 61. It's probably best to wait for a pullback before you buy shares.
