The coronavirus pandemic boosted the prospects for certain industries, like telehealth, streaming entertainment, and digital payments. The restaurant sector, however, was devastated as shelter-in-place restrictions forced many to temporarily close their doors.
This is why Chipotle Mexican Grill's (CMG -0.51%) stellar growth over the past couple of years has been nothing short of spectacular, and the momentum is still going strong.
Let's dissect this top restaurant stock's recent results and growth outlook to determine what investors should do right now.
In the second quarter, Chipotle increased revenue 17% year over year to $2.2 billion. And while this missed Wall Street forecasts, it was still a company record. On the other hand, diluted earnings per share beat consensus analyst estimates and surged 40.2% compared to the prior-year period. Same-store sales, otherwise known as comps, rose 10.1%.
The executive team, led by CEO Brian Niccol, pointed to inflationary pressures causing price-sensitive consumers to frequent Chipotle's restaurants less. But it's not all bad news. "Fortunately, for Chipotle, we over-index with higher-income consumers," Niccol mentioned on the Q2 earnings call.
Facing higher input costs for things like avocados, packaging, dairy products, beef, and chicken, as well as labor, presented a challenge for the business. But Chipotle was able to offset greater expenses with menu price increases, with another price hike of 4% planned in August. The result was a restaurant-level operating margin of 25.2%, an improvement from 24.5% in Q2 2021.
Chipotle's budding digital ecosystem, which now has over 29 million rewards members, has been a major success. Not only does the loyalty program significantly raise accessibility and convenience for customers, but these digital transactions, specifically order-ahead ones, produce the highest margins for the company.
In the quarter, Chipotle opened 42 new restaurants, of which 32 were built with a Chipotlane, the drive-thru option. These retail outfits generate better sales, margins, and returns than stores without one, and they help propel the company's digital push.
Looking ahead, management forecast that the current quarter should see comps growth in the mid-to-high single digits on a year-over-year basis, a considerable slowdown from prior quarters. The leadership team did point to decelerating foot traffic late in the second quarter that will carry over into the current period. But still, posting gains in this macro environment would be a strong showing for Chipotle.
Despite the near-term headwinds from soaring inflation and still-struggling supply chains -- issues that many other companies are also facing -- Chipotle's long-term outlook remains robust. As of June 30, the business counted 3,052 total locations. But there's still a huge growth runway. "I'm certain that over time, we have the ability to grow our average unit volumes and achieve at least 7,000 restaurants across the U.S. and Canada," Niccol said on the call with investors.
More than doubling the store footprint (which doesn't even include penetration in Europe), coupled with rising annual unit sales volumes, means that Chipotle's total revenue and earnings could soar in the decade ahead. Ultimately, this could mean a higher stock price as well.
Hold onto this top restaurant stock
As you can see, Chipotle is still thriving even in a difficult macroeconomic environment. But even though the company's underlying fundamentals remain strong, and the argument could be made that Chipotle is performing as well as it's ever been, the stock looks expensive today.
Shares are currently trading hands at a price-to-earnings multiple of 64, an incredibly steep valuation to pay. This valuation is double that of other restaurant stocks like McDonald's and Domino's Pizza.
Because Chipotle is an outstanding business, investors who already own the stock should continue holding. Unless there is a better investment opportunity you spot instead for your cash, I see no reason to sell right now. But for those who are on the sidelines, I think the best approach is to patiently wait for a pullback before buying shares.