Earnings Rundown

Chipotle earnings delivered, but its stock is starting to look like a high-priced menu item

Chipotle shares surge after earnings beat Wall Street forecasts
Key Points
  • Chipotle Mexican Grill is again trading at a stock market valuation that the fast-casual restaurant chain achieved pre-2016.
  • Its same-store sales continue to improve, but they are not back at the level from the earlier "teens" and with food costs rising, especially avocados, investors have reason to worry about a new all-time high stock price that CMG stock hit after earnings on Tuesday.

Chipotle Mexican Grill was back even before its big Tuesday earnings beat, but its stock has been on such a hot streak it may be entering high-priced menu territory.

The fast-casual restaurant company, laid low for years after a series of foodborne illness issues, is up more than 71% in 2019. It set a new all-time high in extended trading on Tuesday night, above $760, the latest move in a huge rebound for a company that watched its shares sink to as low as $250 as recently as 2018.

For Stephen Anderson, senior v.p. and equity research Analyst at Maxim Group, focusing on the restaurant and consumer sectors, there is good news in the company's operating performance, but caution related to the stock's gains.

The biggest driven has been digital sales growth, the fast-growing source of sales for all restaurants.

"What's really driving top-line growth is the strong acceleration in digital, online and mobile platforms," Anderson said.

Digital sales growth almost doubled, growing 99.1% and making up 18.2% of sales. That compares to 13% of sales at the end of 2018. This was also the first-full quarter for a look at how Chipotle's loyalty program, which launched in March, would help propel a broader digital strategy.

Anderson said CEO Brian Niccol, on the job since leaving Taco Bell and taking over CMG in February 2018, has succeeded in creating a digitally driven culture at the company. "We think there are lots of advantages to digital sales, not just driving volumes. It also helps improve margins, reduce food costs and labor costs. Those are strict positives," Anderson said.

A lid on shares could come next

Source: Chipotle

The quarterly numbers were good across the board.

Chipotle earned $3.99 per share, topping the $3.76 per share expected by analysts surveyed by Refinitiv. Net sales rose 13.2% to $1.43 billion, beating expectations of $1.41 billion.Wall Street was expecting. Same-store sales growth rose 10%, versus 8.33% expected. Transactions at stores open at least a year increased by nearly 7%. The average check jumped by 3.5%, helped by menu price increases.

Chipotle once again raised its full-year outlook for same-store sales growth. It expects sales at restaurants open at least a year to rise at a high-single digit rate, up from a prior estimate of mid-to-high single-digit growth.

Anderson said same-store restaurant sales up 10% was ahead of his 9% forecast, but it does not match the level of same-store sales that CMG once was able to achieve in the days before the food illness outbreaks linked to its locations rattled the company and scared diners away. And that remains the big reason to be concerned about the company's valuation.

"Our question is a valuation story. ... same-store restaurant sales is impressive at 10%, but back in 2012, 2013, 2014 they were doing mid-teens. ... Investors should be mindful of that," Anderson said. He added, "Are we saying it is bad company? By no means. ... Our question is are new investors willing to put up with very high valuations?"

The Maxim Group analyst said one added concern in the "very immediate future" lies with food costs, especially core ingredients like avocados and tomatoes. Avocados have almost doubled in price since the beginning of the year and they are a "high-single digit of Chipotle's whole food basket," he said.

Chipotle said in its earnings that rising avocado costs pushed the cost of food, beverage and packaging up 1.1% in the quarter.

"Investors should be mindful of that as well before considering investment," Anderson said.