Valuentum Exclusive Analysis for the Discerning Investor

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Image Shown: Shares of Chipotle Mexican Grill Inc have sharply rebounded over the past month as investors started to take into consideration the firm’s pristine balance sheet, ability to meet consumer demand via delivery services, and quality cash flow profile, keeping short-term headwinds in mind.

By Callum Turcan

On April 21, Chipotle Mexican Grill Inc (CMG) reported earnings for the first quarter of 2020 that beat both consensus top- and bottom-line estimates. Same-store sales rose 3.3% year-over-year almost entirely due to the strength of its digital business where sales were up almost 81% and represented over 26% of Chipotle’s sales last quarter. Chipotle’s GAAP revenues were up almost 8% year-over-year last quarter though its GAAP operating income fell by over 35% due to elevated operating costs as the firm coped with the emerging (at the time) coronavirus (‘COVID-19’) pandemic. In particular, ‘food, beverage and packaging’ and wage expenses were elevated as Chipotle adjusted its business.

Please note that going forward, Chipotle’s near-term performance will likely take a beating as stay-at-home orders and the “cocooning” of households force the company to rely heavily on its delivery business. Here’s what management had to say on the issue during Chipotle’s latest quarterly conference call (emphasis added):

“Our comps through February was 14.4%, which includes nearly 11% transaction growth, including a 2% benefit from Leap Day… During the month of March, our weekly comp progression was up 12% for the week ending March 8th, down 4% for the week ending the 15th, and down 34% to 35% for the weeks ending March 22nd and the 29th. Sales improved to around down 30% as we entered April and then improved again over the past week with comps adjusted for Easter in the down high teens range.

The beginning of April, in-store ordering is down around 75%, while delivery is up about 150% and order ahead is up nearly 120%, highlighting the importance of our digital platform and setting us up for a bright future as digital sales tend to be sticky. Digital is currently accounting for nearly 70% of sales.”

Chipotle’s past investments in its digital infrastructure and delivery business have allowed the firm to adjust to the “new normal” as we wait out the pandemic. Additionally, Chipotle allows consumers to order ahead and pick up those orders at the store, which apparently is also witnessing surging demand from consumers.

Quality Financials

Chipotle exited March 2020 with $500 million in cash and cash equivalents in hand along with $28 million in restricted cash and $381 million in short-term investments, and no debt on the books. We really appreciate Chipotle’s pristine balance sheet and please note back on March 17, we published an article titled Top Ten Ideas for Consideration Amid COVID-19 (link here) that included Chipotle (back when shares were trading near $520 per share). One of the reasons why Chipotle is a quality company is due to management’s focus on maintaining a fortress-like balance sheet, which is a source of strength during these harrowing times.

In the first quarter, Chipotle continued to be very free cash flow positive, generating $182 million in net operating cash flow while spending $78 million on capital expenditures. Free cash flows of $104 million fully covered $54 million in share repurchases under its stock buyback program and Chipotle does not have a common dividend policy at this time. While those free cash flows will likely come under pressure in the near-term due to the ongoing pandemic, we like the long-term growth trajectory of Chipotle’s cash flows. Management pulled the firm’s full-year guidance in light of COVID-19, noting that (from the earnings press release):

Given the level of volatility and uncertainty surrounding the future impact of COVID-19 on the broader US economy and any specific impact to our company, we are withdrawing our previous fiscal 2020 guidance related to comparable restaurant sales growth, new restaurant openings, and effective full year tax rate.

Beyond the impact on its existing stores, Chipotle will likely see a reduction in its new store openings this year versus its past performance as construction and other activities get delayed due to the pandemic. It varies in the US state by state whether certain construction activities are deemed “essential” or not.

Delivery Business Continues

Given the strength of its digital and delivery business, along with its net cash position, Chipotle is in a better position than many of its peers to ride out the pandemic. Here’s what management had to say during Chipotle’s latest quarterly conference call:

Let me say upfront how proud and grateful I am to all our employees for their positive attitude and efforts in providing guests access to our safe, delicious, high-quality food made from real ingredients.

I want to thank our supply chain partners who have been dedicated to keeping our restaurants stocked with gloves, hand sanitizer, masks, and other necessary items to keep our employees, food, and customers safe. I also want to thank our supply chain partners who’ve delivered our food with integrity ingredients to every open Chipotle restaurant during these challenging times in a healthy and safe way.

As a result, I am pleased to report that only about 100 restaurants are fully closed at this time [Chipotle had over 2,600 restaurants at the end of March 2020]. These are mainly inside malls and shopping centers as well as 17 locations in Europe, while the rest of our restaurants remain open for to go and digital order ahead and delivery services, which is critical at a time where food options are limited.

With the vast majority of Chipotle’s restaurants still operating, the company is in a position to not only take market share in the short-term but potentially solidify its status as a weekly or monthly routine in many households which favorably augments its long-term growth trajectory.

Concluding Thoughts

As of this writing, shares of Chipotle are trading near the top end of our fair value estimate range, which sits at $894 per share. Given the resilience of Chipotle’s business model, we can understand why investors like the name. Shares of CMG have surged over the past month, aided by Chipotle’s quality financials and ability to continue meeting consumer demand during these harrowing times.

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Restaurants (Fast Casual & Full Service Industry) – BJRI CAKE CBRL CMG DENN DIN DRI EAT RRGB RUTH TXRH

Restaurants (Fast Food & Coffee/Snacks Industry) - ARCO DPZ DNKN JACK MCD PZZA SBUX WEN YUM

Related: QSR, PEJ, PBJ

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Callum Turcan does not own shares in any of the securities mentioned above. Cracker Barrel Old Country Store Inc (CBRL) is included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.