Chipotle Mexican Grill (CMG): Digital channel gains momentum during pandemic period

Shares of Chipotle Mexican Grill Inc. (NYSE: CMG) were down nearly 5% in afternoon hours on Thursday. The stock has gained 55% since the beginning of this year. A day ago, the company reported third quarter 2020 earnings results beating market estimates for both the top and bottom lines.

At present, around 10 of Chipotle’s restaurants remain closed while around 85% of its locations are offering limited in-restaurant and/or patio dining and the rest are open for to-go services. The company witnessed significant momentum from its digital channel during the third quarter and it plans to invest meaningfully in improving its digital capabilities going forward.

Quarterly performance

Revenue increased 14% to $1.6 billion while comparable restaurant sales rose 8.3%. Adjusted EPS fell 1.6% to $3.76. Average restaurant sales amounted to $2.2 million. The company opened 44 new restaurants and closed three, ending the quarter with 2,710 restaurants.

Digital channel

During the quarter, digital sales rose 202.5% year-over-year to $776.4 million and represented 48.8% of sales. Chipotle has been able to retain 80-85% of its digital sales gains since late March and the company is focused on improving its digital experience significantly.

From the Q3 transcript:

The stickiness of digital is a key factor in allowing us to deliver strong results, and we’ll continue to invest in making the digital experience as easy and frictionless as possible as illustrated by the recent launch of our group ordering feature on the Chipotle app.

As more people worked from home and dined out less, Chipotle was able to bring new customers onto its digital platform through advertising, digital awareness, partnerships with food delivery services like Uber Eats and GrubHub, and also the expansion of digital capabilities into Canada.

The company saw strength in its delivery as well as order ahead and pickup channels with benefits from its partnerships. If the momentum seen this quarter continues through the fourth quarter, Chipotle believes digital sales could surpass $2.5 billion in 2020, more than doubling year-over-year.

Outlook

Looking into the fourth quarter, food costs are expected to come in the low 32% range while labor costs are expected to be around 25%, similar to the ranges seen in Q3, as the benefit from delivery menu price increases are likely to be offset by the launch of Carne Asada as well as by lower seasonal sales.  

Chipotle saw an increase in delivery expenses due to the growth in the digital business during the third quarter and this trend is expected to continue going forward. Overall restaurant margins in the fourth quarter are expected to be similar to the third quarter while underlying margins are projected to improve by around 200 basis points sequentially.

Due to the uncertainty related to the COVID-19 pandemic, Chipotle is unable to provide comparable sales guidance for fiscal year 2020.

Click here to read the full transcript of Chipotle Q3 2020 earnings call