Chipotle Reported Solid Third Quarter Results – Strong Long-Term Growth Thesis Remains Intact

  • F3Q2020 revenues of ~$1.6 billion beat analyst projections by ~$10 million.
  • EPS of $2.82 missed consensus estimates by $0.61.
  • Company evidenced substantial gains in dine-in and digital sales over the quarter.
  • We’re increasing our 1-year Price Target to $1,477/share from the prior $1,446/share. Reiterate Buy Rating.

Investment Conclusion

Overall, we were encouraged by Chipotle Mexican Grill’s (CMG) F3Q2020 financial performance. After experiencing a decline in revenues in F2Q2020, the company rebounded to significant revenue growth on a year-over-year basis over the quarter. Restaurant margins although slightly lighter on a year-over-year basis experienced a substantial rebound from the last quarter. While, compared to F3Q2019, Earnings Per Share driven by unusual expenses and COVID-19 related spending decreased, it is noteworthy that excluding the significant one time legal expense incurred over the period, net income would have been higher compared to F3Q2019. In addition, excluding extraordinary items, the quarter’s gross profit and operating income would have increased over the same quarter last year.

Short term, based on the financial outcomes and business developments over F3Q2020, we expect strong revenue growth over the next couple of quarters, even as CMG encounters difficult comparables from last year’s retail sales of their wildly popular menu item Carne Asada, which coincidently, was reintroduced in September. We expect gains in revenues from the growing popularity of CMG burritos, the loyalty program that has ~17 million members, the return of Carne Asada, and the quickly expanding number of Chipotlanes. In addition, in our assessment, restaurant margins will continue to improve, and gross profits and operating income will increase in absolute dollar terms, even if associated margins come in lighter over the period. Overall, we expect earnings and free cash flow growth over the next two quarters.

Longer term, considering the rapid footprint expansion underway and initiatives in place to drive same store sales growth, CMG is well positioned to experience retail sales leverage, economies of scale, and improved purchasing power that will ultimately lead to margin expansion and improved profitability, and consequently significantly higher: earnings and free cash flows. Based on F3Q2020, we’re confident that CMG is on track to deliver our 10-year: revenue growth rate of 13.5%, restaurant count target of 6,000, and average unit volumes of $2.8 million. Therefore, limiting model adjustments to minor changes, we arrive at our slightly revised 1-year Price Target of $1,477/share from the prior $1,446/share. Reiterate Buy Rating. (Please go through our initiation report “Chipotle Mexican Grill: Turnaround Story With Substantial Growth Potential” and related notes for our long-term opinion on the stock).