Chipotle [CMG] has accelerated “stage-gate testing” of new menu items under CEO Brian Niccol, previously head of Taco Bell. Many of these are online-only, as the company continues to hold increased online sales even as restaurant takings recover from the impact of the coronavirus pandemic.
Following a positive set of Q2 results, Niccol acknowledged that increased costs such as wage and commodity price increases had prompted price hikes for its customers. The fortunes of Chipotle’s stock price looked up in the midpoint of this year, driven by the earnings. The Chipotle share price gained 33.17% in the year to 7 October. Despite this good run, the stock has recently entered a dip, falling 6.18% in the final week of September. It has since recovered by 1.6% to close on 7 October at $1,846.67.
In the year to date, the Chipotle share price has outperformed the S&P 500 and dominated its competitors in the AdvisorShares Restaurant ETF [EATZ]. The ETF fallen 4.7% since its inception on 21 April. As of 7 October, Chipotle is EATZ’s twelfth largest holding, with a 3.96% weighting.
Online sales up, new menu items in at Chipotle
The firm remained relatively resilient throughout the pandemic, with strong online performance generally mitigating a slight decline in restaurant sales and profitability. Following Q2 2020, the company reported a fall in restaurant sales and margins. However, a 216.3% increase in digital sales meant that revenue fall was mitigated.
A year, on Chipotle’s Q2 2021 report showed that dining room sales were already at 70% of 2019 levels thanks to reopening, with Q2’s total quarterly revenue above that of 2019. Online sales increased 10.5% year over year, to account for almost half of all sales.
A delivery cut
While online sales have sustained the burrito chain, it will be wary of leaning too heavily on them in the long run. A report from McKinsey released on 22 September highlighted the fact that most restaurants make margins of between 7% and 22%. Chipotle’s latest earnings announcement revealed it had an operating margin of 24.5%. Even so, the typical 15-30% cut taken by delivery platforms will eat into its delivery revenue and profitability if left unchecked.
Improving restaurant sales will be the quickest and most profitable route back to pre-COVID levels.
Chipotle is continuing to innovate with its product offering in an attempt to stay ahead of its competition. It has recently unveiled new menu items, such as smoked brisket and meatless chorizo.
The chorizo is aimed to capture the growing plant-based consumer market. “Plant-based lifestyles have continued to accelerate in popularity,” said Chipotle’s chief marketing officer Chris Brandt in a statement. “We are exploring ways to give more variety to our fans.” Brandt its meatless endeavours were received well in Cincinnati and Sacramento test markets.
“Plant-based lifestyles have continued to accelerate in popularity. We are exploring ways to give more variety to our fans” - Chipotle’s chief marketing officer Chris Brandt
What's ahead for Chipotle’s share price?
Despite the pandemic disruption, Chipotle’s sales and earnings have grown steadily since 2016. Revenue rose 60% from $1.0bn in 2016 to $1.6bn in 2020, and diluted earnings per share have gone up 1,116.36% from $0.55 in 2016 to $6.69 in 2020.
EPS increased 55% in 2019 and despite a fall in 2020 it is expected to more than double in 2021. CNN Money analysts make a consensus forecast of $25.55, 138.13% above last year’s figure.
The Chipotle share price is currently below its 50-day and shorter term moving averages, but still higher than its 200 day moving averages. Out of 34 analysts polled by CNN Money 18 recommend a ‘buy’ on the Chipotle stock. It appears a good time to buy Chipotle, but that may not continue for much longer.
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