On March 29, the Trump administration extended the lockdown until April 30. Currently, most restaurants have closed their dine-in spaces and only operate takeout and delivery services. The operational changes have lowered restaurants’ sales. Today, Bloomberg reported that researchers at NPD Group estimated a 36% decline in customer traffic for the week ending on March 22. Chipotle Mexican Grill (NYSE:CMG), which has most of its restaurants in the US, is in the middle of the COVID-19 storm. However, CFO Jack Hartung is confident about weathering the storm.
On April 1, in an interview with Bloomberg, Hartung said that Chipotle is well-positioned to ride out the storm. He said that the outbreak has an unprecedented impact on the restaurant industry. Every company has lost a significant part of their business. He said that Chipotle can survive for several months or even a year with lower sales.
As reported by Bloomberg, Chipotle had $880.8 million of cash and short-term investments at the end of last year. The company will save money by delaying the development of new restaurants, cutting-down on executive travel, and reconsidering the hiring of project consultants. Hartung said that the company is in talks with landlords about rent deferrals for its restaurants and office locations. Chipotle has closed 2%–3% of its 2,6000 restaurants.
Analysts’ recommendations for Chipotle
Since the beginning of last month, SunTrust Robinson, Piper Sandler, RBC, Jefferies, Telsey Advisory Group, Stifel, Bernstein, KeyBanc, and Cowen have all lowered their target prices. As of April, analysts’ consensus target price was $830.22. The target price represents a 12-month return potential of 34% from its April 1 closing price of $619.36. Despite the price cuts, Wall Street is bullish on the stock. Among the 32 analysts, 50% recommend a “buy,” 46.9% recommend a “hold,” and 3.1% recommend a “sell.”
Since the beginning of this year, Chipotle has lost 26% of its stock value. The company has underperformed McDonald’s (NYSE:MCD) and the broader equity market. The S&P 500 Index has fallen by 23.5%, while McDonald’s has fallen by 20%. Meanwhile, Shake Shack (NYSE:SHAK) and Starbucks (NASDAQ:SBUX) have lost 45.4% and 28.8% of their stock values, respectively. The decline in Chipotle’s stock price has also dragged its valuation multiple down. As of Wednesday, Chipotle was trading at a forward PE ratio of 38.3x compared to 46.8x at the beginning of this year. The stock also trades at a premium compared to McDonald’s and Starbucks. On the same day, McDonald’s and Starbucks were trading at 20.1x and 21.9x, respectively. Shake Shack was trading at a forward PE ratio of 270.0x on the same day.
As on Wednesday, Chipotle was trading at 43.0x analysts’ 2020 EPS estimate of $14.37 and at 28.6x analysts’ 2021 EPS estimate of $21.65. Analysts’ EPS expectations represent a YoY growth of 2.3% in 2020 and 50.6% in 2021.
My take on Chipotle
Chipotle owns and operates all of its restaurants. So, store closures and weak sales might impact Chipotle more. Currently, the company is trading at a very high valuation multiple. So, I think that the stock could see near-term pressure. However, Chipotle focuses on introducing new menu items, driving digital sales, growing loyalty program members, and marketing and promotional initiatives to drive its sales. I think that these initiatives could drive the company’s SSSG. So, investors with a long-term perspective should utilize the dips and accumulate the stock.