Shares of Chipotle Mexican Grill Inc. (CMG) roared higher in after-hours trading Tuesday following a strong second-quarter earnings beat. The burrito chain’s top and bottom lines surpassed Wall Street expectations, galvanizing investors to push CMG stock to its highest level ever.
The company has been on an incredible hot streak in recent years, with shares nearly tripling from their $271.90 bottom in October 2017. But the latest earnings reflect a seismic shift in Chipotle’s sales strategy toward more digital sales. After posting such incredible numbers for the April-June period, investors are wondering if revenue from online orders will keep growing or if the second quarter was one-time fluke.
Here’s a closer look at Chipotle’s latest financials — and how digital sales factor into the company’s bullish narrative…
The News
Chipotle reported earnings per share (EPS) of $3.99 for Q2, beating analysts’ expected $3.76 by 6.1% and growing a whopping 39% from the $2.87 reported a year ago. As for the top line, the firm’s revenue increased more than 12% year-over-year from $1.27 billion to $1.43 billion. That also surpassed Wall Street’s estimated $1.41 billion by 1.4%. The strong numbers were largely due to a 1.1% rise in food costs from last year and soaring Haas avocado prices, which, according to the U.S. Department of Agriculture, have nearly doubled this month alone.
Same-store sales also impressed analysts and investors, as growth hit 10% compared to Wall Street’s expected 8.33%. Officials revised its full-year outlook for the metric, saying they now expect it to rise at a “high single digit rate” in 2019 compared to the previous “mid-to-high single-digit” forecast.
CEO Brian Niccol, who left his leadership position at Taco Bell in February 2018 to head Chipotle, was incredibly optimistic about his new firm’s performance over the last 18 months. He commented, “We’re pleased with our financial performance, which marks the sixth consecutive quarter of accelerating comps and reflects continued progress on our key strategic initiatives.”
How Investors Reacted
While shares dropped 0.4% to $739.60 during Tuesday’s session, they quickly shot up 3.5% in after-hours trading to an all-time high of $765.30. At that post-session price, CMG stock is now up a stunning 77.2% on the year since the Dec. 31 close of $431.79. That dominates other giant fast-food stocks like McDonald’s Corp. (MCD) and Yum! Brands Inc. (YUM), which have respectively climbed 20.7% and 22.85% in 2019 so far.
The Bigger Picture
Online orders have become a major focal point of Chipotle’s turnaround following the E. Coli meltdown of late 2015 and early 2016, and it’s become clear that the company plans on keeping it that way.
In their earnings call, Niccol and CFO Jack Hartung primarily focused on Chipotle’s newly rejuvenated digital sales, which grew an unfathomable 99.1% in the second quarter and constituted 18.2% of overall sales during the period. This was mainly thanks to the online rewards program adding 3 million new members, with Hartung remarking “we don’t think we have found the level or limit of how high it can go up.”
Continued growth in online orders will likely come from Chipotle’s strong partnership with delivery service DoorDash. The two firms are aggressively pushing online sales by offering free delivery and lenient fees, as roughly 95% of all Chipotle locations now offer delivery service thanks to DoorDash as well as fellow services Postmates and Tapingo.
Looking Ahead
Just three years ago, a 70% year-to-date gain seemed unfathomable when Chipotle stock was cratering to record lows on the back of a massive E. Coli crisis. But with a modernization strategy led by a new and exceptional CEO, it seems investors are more bullish on CMG than ever before. Barring any outbreak of food-borne illnesses, there’s no reason to think Chipotle’s digital sales won’t continue to grow in the interim.
That being said, CMG stock is still fundamentally expensive, as the $765.30 share price floats at more than 104 times the latest full-year earnings. New investors looking for an entry point should wait for a temporary dip before buying any shares. However, current CMG owners should hold on and ride the digital-fueled rally until it runs out of steam.