Can Digital Sales Continue to Drive Chipotle’s Revenue in Q2?

Analysts’ expectation

Chipotle Mexican Grill (CMG) plans to report its second-quarter earnings after the market closes on July 23. For the quarter, analysts expect both Chipotle’s revenue and EPS to rise.

Can Digital Sales Continue to Drive Chipotle’s Revenue in Q2?

Chipotle’s revenue to rise

Analysts are projecting Chipotle to report revenues of $1.41 billion in the second quarter. YTD, the company’s revenue is likely to increase by 11.0% from $1.27 billion in the corresponding quarter of 2018. The opening of new restaurants and positive SSSG (same-store sales growth) could drive Chipotle revenue during the quarter.

At the end of the first quarter of 2019, Chipotle operated 2,504 restaurants. Compared to its restaurant count at the end of the second quarter of 2018, the company operated 37 more restaurants. These 37 restaurants opened during the second quarter of 2019 are likely to drive the company’s revenue.

Chipotle’s management is working on expanding its delivery services, implementation of digital advancements, menu innovation, and various marketing and promotional programs to drive its SSSG. In the first quarter, Chipotle’s digital sales rose 101% to form 15.7% of the company’s total sales. Chipotle had implemented mobile order pickup shelves in all of the relevant restaurants by the end of the last quarter. Also, the company had installed digitized make-lines in 1,300 of its restaurants. Chipotle plans to expand the digital make-up line to all of its restaurants by the end of this year. On March 12, Chipotle had launched its loyalty program “Chipotle Rewards.” There were approximately 3 million members enrolled in the program by the end of the first quarter.

Chipotle’s EBIT margin to expand

Analysts expect CMG’s EBIT margin to improve from 8.7% in the second quarter of 2018 to 10.1%. The increase in menu prices, sales leverage from positive SSSG, and improvement in the supply chain’s efficiency could drive the company’s EBIT margin. However, an increase in food prices, labor inflation, and higher other operating expenses could offset some of the expansion in Chipotle’s EBIT margin. Higher marketing and promotional costs and increased delivery fees due to incremental sales could raise Chipotle’s other operating expenses.

Can Digital Sales Continue to Drive Chipotle’s Revenue in Q2?

CMG’s EPS drivers

For the second quarter of 2019, analysts expect Chipotle to report adjusted EPS of $3.76. Year-over-year, the company’s EPS are expected to rise by 31% from $2.87 in the second quarter of 2018. The revenue growth, expansion of EBIT margin, and share repurchases are likely to drive the company’s EPS. However, a higher effective tax rate could offset some of the increase in EPS. In the first quarter, Chipotle has repurchased 92,545 shares for approximately $52.5 million. At the end of the first quarter, the company still had the authorization to repurchase shares worth approximately $105.1 million.

Outlook

In 2019, Chipotle’s management plans to open 140–155 new restaurants. The management is projecting its SSSG to be in the range of mid to high-single digits for the same period. Analysts expect the company to post revenues of $5.43 billion in 2019, which implies a rise of 11.6% from $4.86 billion in 2018. During the same period, its EPS are forecasted to rise by 44.5% to $13.09.

Can Digital Sales Continue to Drive Chipotle’s Revenue in Q2?

CMG’s performance

As of July 17, CMG was trading at $752.56, which implies a rise of 13.6% since the announcement of its first-quarter earnings on April 24. The strong performance in the first quarter and investors’ optimism over the company’s initiatives, such as the implementation of digital advancements and expansion of delivery service have led to a rise in the company’s stock price. In the first quarter, CMG had reported an adjusted EPS of $3.40, outperforming analysts’ EPS estimate by 13.0%. The company had also exceeded analysts’ SSSG and revenue expectations. You can read more about Chipotle’s first-quarter performance in Chipotle Beat Analysts’ Expectations in Q1.

Year-to-date, Chipotle has returned 74.3%. The company has outperformed its peers and the broader equity market. During the same period, Chipotle’s peers Shake Shack (SHAK) and McDonald’s (MCD) have returned 62.7% and 20.4%, respectively. The S&P 500 Index and the Consumer Discretionary Select Sector SPDR ETF have returned 19.1% and 24.4%, respectively.

Valuation multiple

Although Chipotle’s stock has increased by 13.6% since the announcement of its first-quarter earnings, its valuation multiple has declined. As of July 17, the company was trading at a forward PE multiple of 49.7x compared to 52.2x before the announcement of its first-quarter earnings. The impressive first-quarter performance appears to have prompted analysts to raise their EPS expectations for the next four quarters leading to a fall in Chipotle’s forward PE multiple. In comparison, Chipotle’s peers McDonald’s and Shake Shack were trading at a forward PE multiple of 25.4x and 111.2x, respectively.

Also, of July 17, CMG was trading at 57.4 times analysts’ 2019 EPS estimate of $13.10, and 44.6 times analysts’ 2020 EPS estimate of $16.86 with its EPS expected to rise by 44.6% in 2019 and 28.7% in 2020.

Can Digital Sales Continue to Drive Chipotle’s Revenue in Q2?

Analysts’ recommendations for CMG

Since the beginning of June, Piper Jaffray, J.P. Morgan, and Cowen and Company have all raised their price targets for CMG. Piper Jaffray has hiked its price target from $792 to $824, J.P. Morgan has increased its price target from $600 to $650, and Cowen and Company has increased its price target from $660 to $730. Also, on June 25, Credit Suisse had initiated coverage on Chipotle with an “outperform” rating and a price target of $870.

Overall, analysts favor a “hold” rating for CMG with 45.5% of the 33 analysts that follow the stock giving it a “hold” rating. 36.4% are favoring a “buy “rating, and the remaining 18.2% are advocating a “sell” rating. On average, analysts have given Chipotle a 12-month price target of $703.92, which implies a fall of 6.5% from its stock price of $752.56.

Domino’s reported its second-quarter earnings on July 16. If you are interested in reading our analysis of Domino’s second-quarter performance, please read Domino’s Stock Falls on Weak Q2 Sales.