Can Chipotle’s Strong Performance Continue In The Second Quarter?

Chipotle Mexican Grill (NYSE: CMG) will announce its second quarter earnings on July 26, wherein a rise in both revenue and earnings per share is expected. Revenue growth is expected to be driven by an improvement in comparable sales, increased digital sales, and new store openings. Higher revenues, improvement in restaurant level margins, and a lower tax rate will help to drive earnings. New CEO Brian Niccol has had an upbeat start to his tenure as the company posted first quarter revenues that were largely in-line with consensus estimates, as well as an earnings beat. The company expects the comps to grow at low-single digits for the full year, as well as restaurant level margins to improve to, or even exceed, the 17.5% to 18.5% range.

Subsequent to the posting of strong first quarter results and full year guidance, we updated our price estimate for Chipotle Mexican Grill to $416, although our new price is still lower than the current market price. The charts have been made using our new, interactive platform. The various driver assumptions can be modified by clicking here for our interactive dashboard, to gauge their impact on the earnings and price per share metric.

Factors That May Impact Future Performance

1. CEO Change: Brian Niccol joined CMG as its new Chief Executive Officer (CEO), effective from March 5, 2018. Niccol comes from Yum! Brands where he was the CEO of Taco Bell. He was instrumental in implementing a successful turnaround of that business. Niccol comes with strong expertise in digital technologies, restaurant operations, and brand building, and these skills are crucial for Chipotle’s turnaround. During the first quarter earnings call, Niccol mentioned the possibility of expanding to breakfast items, and incorporating drive-thrus, besides increasing the focus on the digital platform.

2. Accelerating Digital Sales: This is the fastest growing part of CMG’s business, with a growth of 20% reported in the first quarter, and which now represents 8.8% of the total sales of the company. This digital sales growth has been led by mobile ordering, which was up 41% over the previous year. In 2018, CMG intends to accelerate the rollout of its digitally-enabled second make-lines. These new lines enable a faster, and a more accurate experience for the digital customers, and allows CMG’s staff to more easily support the higher sales volumes. Cumulatively, including new restaurants, the company expects to have at least 30% of its restaurants outfitted with these new second make-lines by the end of 2018.

3. Adding Catering and Delivery: Catering forms roughly 1% of the total sales, and is a largely untapped opportunity for the company. CMG expanded its catering delivery availability to 1,500 restaurants in the first quarter, from 940, and on average, has noted a 15% lift in catering sales when delivery is added. Meanwhile, the company’s delivery sales continue to grow at a fast pace, and CMG intends to expand the number of delivery partners it works with. The company recently shared details of its successful partnership with DoorDash, its largest delivery partner, and stated that Chipotle has seen a 667% increase in weekly delivery orders since initiating the partnership.

4. New Restaurant Openings: CMG opened 35 new restaurants in Q1 and continues to expect 130 to 150 new openings for the full year. Moreover, the company has plans for a similar number of openings for 2019 as well. New restaurant openings can have a significant positive impact on the company’s revenues. Meanwhile, the company is also in the process of reviewing roughly 100 underperforming restaurants.

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