The headline numbers in Q2 2020 didn’t look too good for Chipotle (NYSE: CMG)
Sales dipped 4.8% yoy and comps decreased by 9.8% yoy. But Chipotle’s numbers compare favorably with its peers
and there are several reasons to believe that Chipotle will see rapid growth post-pandemic.
Comps Got Better as Q2 Progressed
Three months ago, Wedbush Securities Analyst Nick Setyan projected that Chipotle’s comps would dip 9% in Q2. He projected a better Q2 than most Chipotle analysts at the time, and he came pretty close.
Comps improved as Q2 progressed with April down 24% yoy, May down 7% yoy, and June increasing 2% yoy. At the time of the Q2 earnings call, July comps were up 6.4% month-to-date compared to the same period a year ago.
Even though Chipotle is not providing guidance on comps for the remainder of 2020, it’s reasonable to expect its performance in the second half of 2020 to look more like June/July than April/May. And improving comps aren’t the only way that Chipotle is going to increase its sales.
Expansion Could Be Bigger Than Previously Predicted
Chipotle CEO Brian Niccol recently came out and said that he believes Chipotle can eventually open 6,000+ restaurants, substantially higher than the previous estimate of 5,000 potential stores.
Chipotle currently has around 2,700 restaurants, so that would represent a 122%+ increase.
Look at a restaurant chain like McDonald’s, with its 37,000+ restaurants, and you realize that 6,000+ restaurants aren’t even all that much.
Chipotlane is the Future
Chipotlane, which is a drive-thru pick-up lane that is part of some Chipotle restaurants, has the potential to boost Chipotle’s revenue growth.
Pre-pandemic, Chipotle planned to include Chipotlane in 50-60% of its new stores.
Now, Chipotle plans to include a Chipotlane in more than 60% of its new restaurants in 2020 and 70%+ in 2021. In Q2, Chipotle opened 37 new restaurants – 21 had a Chipotlane, which works out to a shade under 57%.
It’s easy to see why management wants to utilize Chipotlane. On the Q2 earnings call, CFO John R. Hartung noted, “Of the 13 Chipotlane that are in our comp base and therefore opened well before COVID, sales were over 10% higher than the non-Chipotlane comp restaurant from the same opening period while the more recent openings during COVID are actually 30% higher.”
Digital Trends are Encouraging
In Q2, digital sales increased 216% yoy to $829 million, accounting for 61% of sales. That came on the heels of Q1, when digital sales increased 80% yoy, making up 26.3% of revenue.
Chipotle’s customer loyalty program also recorded a nice increase in Q2 – perhaps unsurprisingly. The program now has nearly 15 million members, up from 11.5 million members at the end of Q1.
Even more encouraging is “since sales troughed in late March, we've been able to retain 70% to 80% of our digital sales gains while recovering 40% to 50% of our in-store sales.”
It’s great to see that dine-in gains are not being met with equivalent losses in digital.
Valuation is Lofty… But Still Reasonable
Back in June, I said that Chipotle was a solid value despite being expensive based on traditional metrics, due to its massive growth potential.
Shares are now around 22% more expensive than they were back then, but the Q2 earnings report makes me even more of a believer.
Chipotle simply has so many sources of upside. To recap, there is:
- Potential for 122%+ expansion.
- Chipotlane comps bode well for the future.
- Strong digital business that is maintaining a good chunk of its gains despite return of dine-in.
So even at around 122x forward earnings and, looking a year-out, 63x earnings, I’m still a buyer.
Wait for a Consolidation and Breakout
I like the fundamentals on Chipotle, but the chart has some work to do. Although shares have moved from overbought to neutral territory on the RSI, CMG is long-term extended.
Furthermore, shares spent the month of August drifting upwards on light volume. That’s not a long-term issue, but it shows a near-term lack of conviction and strength for the bulls. Now, Chipotle has dipped, along with a lot of other stocks, over the past week.
I’d look for a consolidation of at least 4-6 weeks, followed by a convincing breakout, before getting in.
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