Restaurants have been among the biggest losers of the coronavirus pandemic. Forced to shudder their doors, the ability to offer curbside pickup and delivery has been a small consolation for many.
But Chipotle (NYSE: CMG) has bucked the trend. The fast-casual restaurant has been resilient in the face of COVID.
Chipotle shares have had their ups and downs over the years. Food safety concerns almost torpedoed the stock a few years ago. Shares recovered.
The pandemic threatened to do the same. CMG lost more than half its value between mid-February and mid-March. But after making a 52-week low at $415, prices have marched higher over the past three months, setting an all-time high in May at $1,086.30.
The stock looks ready for another leg up.
So how has Chipotle thrived post-pandemic as many of its peers have struggled?
The coronavirus forced restaurants to completely shut down their dine-in operations. Even now, as restaurants in certain parts of the country are allowed to let people dine-in, strict social distancing requirements make full capacity impossible.
But Chipotle’s moves over the past several years to strengthen its online ordering business are paying off.
The company’s total revenue increased by 7.8% to $1.4 billion in Q1 2020. But digital sales increased by a staggering 81% and accounted for 26.3% of total revenue.
This digital success comes on the back of its customer loyalty program. The program now has 11.5 million members. Daily sign-ups almost quadrupled in the last month before the earnings release.
Chipotle effectively markets to these members by sending them personalized communications. During the pandemic, it has been more important than ever to maintain a direct line to customers. Chipotle constantly stays on its customers’ minds, driving the online orders.
While the online business has been successful, it still requires stores with a physical presence to fulfill them.
Same-Store Holds Up and Expansion Set to Continue
In Q1 2020, same-store sales increased by 3.3% yoy. However, comps started to deteriorate towards the end of the quarter. Some analysts were forecasting a 20% decline in same-store sales for Q2, but Wedbush Securities Analyst Nick Setyan raised his estimates three weeks ago. The Wedbush team believes that same-store sales will dip just 9% in Q2 and that they could turn positive in Q3, sending the stock 5% higher on the update.
While Chipotle’s same-store sales have weathered the storm, the company has a lot of room to expand. CMG only has around 2,600 locations and less than 50 of those are outside the US. We are far from having a Chipotle on every corner. And with over $900 million in cash and short-term investments and no debt, the fast-casual chain can build hundreds or maybe even thousands of new locations over the next few years.
During the Q1 earnings call, CFO John R. Hartung said, “Our new unit development pipeline is continuing to build as we remain confident about the long-term opportunity to more than double Chipotle restaurants in the US, and we're already beginning to see an increase in sites available as other businesses have pulled back.”
That last part is key – Chipotle can be aggressive and snap up attractive properties at a discount. The slow economy may also make landlords more willing to accommodate Chipotle’s drive-through operations, dubbed “Chipotlane.” Sometimes a property needs to be modified to accommodate it – a buyer’s market makes landlords more willing to acquiesce.
Before the coronavirus, Chipotle had said it would try to include Chipotlane in 50-60% of its new stores. On the latest call, Hartung said he could see that number being higher.
Chipotle shares look expensive by traditional metrics at around 120x projected 2020 earnings and around 57x projected 2021 earnings. But these numbers are a bit deceiving because Chipotle is spending a lot on expansion and marketing. Furthermore, every indication is that the chain is poised for high growth over the next few years and beyond.
Still, it would take a leap of faith to buy and hold Chipotle. The restaurant industry is tough in the best of times and there is a lot of growth priced into the shares. But that growth potential is huge, and it makes Chipotle a solid value at current levels.
Since making its all-time high in May, Chipotle has spent a month in a base between around $950 and $1,080 a share. The volume has been light, and the price action has been controlled, showing that investors haven’t been spooked by Chipotle’s higher share price. The stock looks to be on the verge of a breakout; if it breaks the old highs on high volume, it would be a strong buy candidate.
Companies Mentioned in This Article
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