It has been about a month since the last earnings report for Chipotle Mexican Grill (CMG - Free Report) . Shares have added about 16.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Chipotle due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Chipotle Q1 Earnings Top Despite Coronavirus
Chipotle Mexican Grill, reported first-quarter 2020 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate. While the bottom line beat the consensus estimate for the 10th straight quarter, the top line surpassed the same for the sixth consecutive time.
The company’s adjusted earnings of $3.08 per share surpassed the Zacks Consensus Estimate of $2.50. However, the bottom line declined 9.4% from $3.40 reported in the year-ago quarter.
The decline was primarily due to an increase in restaurant closure costs as well as costs related to restructuring of business due to the COVID-19 crisis. As a result of the pandemic, nearly 100 restaurants were temporarily shut.
Revenues & Comparable Restaurant Sales
Quarterly revenues of $1.4 billion surpassed the consensus mark by 1.2% and improved 7.8% year over year. The upside can primarily be attributed to improvement in comps, digital sales and new restaurant openings. In the quarter under review, Chipotle opened 19 restaurants and closed two, taking the total restaurant count to 2,638.
Digital sales grew 80.8% year over year to $371.8 million during the first quarter of 2020. Digital sales represented 26.3% of sales during the quarter. The company has increased its focus on digital and delivery services as the dine-in facility has been stopped due to the spread of the virus. As a result, digital sales for the month of March grew 102.6% year over year and represented 37.6% of sales.
Comps in the first quarter increased 3.3%, including a benefit of 1.3% related to leap day. The 4.9% increase in average check, which includes a 2.0% benefit from menu price increases that were implemented during 2019, partially offset by a 1.4% decrease in comparable restaurant transactions, also led to the upside.
Costs, Operating Highlights & Net Income
Food, beverage and packaging costs, as a percentage of revenues, increased 60 basis points (bps) to 32.8%, compared to 32.2% reported in the year ago quarter. It was primarily due to an increase in ingredient costs and food expenses related to Chipotle rewards, partially offset by an increase in menu prices and lower paper costs.
Restaurant-level operating margin of 17.6% declined 340 bps from 21% in the year-ago quarter. The downside was primarily due to wage inflation, increased food costs, high marketing and delivery expenses, partially offset by leverage in comps growth. Notably, the sudden change of its business structure due to COVID-19 in March resulted in a short term, outsized impact on labor and food costs.
Adjusted net income in the reported quarter amounted to $87.2 million, compared with $95.5 million in the prior-year quarter.
The company has $909.2 million in cash, restricted cash, and short-term investments as of Mar 31, 2020. The company doesn’t have any debt. A strong balance sheet will help the company tide over the coronavirus-induced crisis.
Inventory totaled $23.3 million as of Mar 31, 2020, down from $26.1 million as of Dec 31, 2019. Goodwill, as a percentage of total assets, was 0.4% at the end of the first quarter of 2020.
The company plans to open several new restaurants. However, with a pipeline of 49 restaurants under construction, the company has been experiencing construction delays on majority of its projects due to the spread of coronavirus.
Given the level of volatility and uncertainty revolving around the coronavirus impact, the company has withdrawn its 2020 guidance.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted -367.54% due to these changes.
Currently, Chipotle has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Chipotle has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.