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Chipotle Beats Analysts’ Expectations, Stock Falls

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Yesterday, Chipotle Mexican Grill reported impressive second-quarter earnings. Driven by strong digital sales, the company posted revenue of $1.36 billion, which beat analysts’ expectation of $1.34 billion. Its adjusted EPS also came in strong at $0.40, which beat the expectation by over 14 percent. Despite the strong performance, Chipotle’s stock fell over 1 percent in post-market trading hours. As the stock has rallied more than 185 percent from its March lows, investors want to book their profits.

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Chipotle’s revenue falls

YoY (year-over-year), Chipotle’s revenue fell 4.9 percent from $1.43 billion. The company’s same-store sales growth (SSSG) turned negative amid the pandemic restrictions, which dragged down the company’s sales. The company’s same-store sales fell 9.8 percent in the quarter, 24.4 percent in April, and 7 percent in May, respectively. Chipotle's same-store sales rose 2 percent in June.

Chipotle’s online sales grew over 216 percent to account for 60.7 percent of the company’s total sales during the quarter. The company has credited its investment in digital assets for its strong growth. Chipotle said that it will continue to invest in enhancing customers’ digital experience. Recently, the company announced the opening of its 100th Chipotlane. Even after dining spaces have reopened, digital sales have contributed close to 50 percent of sales this month. The company’s SSSG has increased by 6.4 percent in July.

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This quarter, Chipotle has opened 37 new restaurants, which raised its restaurant count to 2,669. Overall, in the last four quarters, the company has increased its unit count by 570, which offset some of the sales declines. Meanwhile, 30 restaurants are still closed due to the COVID-19 pandemic.

Chipotle’s adjusted EPS falls over 90 percent

In the second quarter, Chipotle reported diluted EPS of $0.29. Excluding special items, the company’s adjusted EPS were $0.40, which represents a 90 percent fall YoY from $3.99. Lower sales and higher operating expenses dragged down the company’s EPS.

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Higher labor, occupancy, other operating, and pre-opening costs, along with higher depreciation and amortization expenses, increased the company’s operating expenses. During the quarter, Chipotle’s labor expenses increased from 25.7 percent of its total revenue to 28.2 percent. Wage inflation, COVID-19 assistance pay, and sales deleveraging from negative SSSG boosted the company’s labor expenses. An increase in delivery expenses due to higher delivery sales and sales deleveraging raised its other operating expenses.

Meanwhile, Chipotle’s food, beverage, and packing costs fell 0.4 percent due to lower avocado prices, increased menu prices, and a decline in freight and paper costs. Its general and administrative expenses also fell from 8.5 percent to 7.5 percent.

Chipotle is a zero-debt company. At the end of the second quarter, the company’s liquidity stood strong at $934.6 million. The company’s access to $600 million in credit has strengthened its position amid the COVID-19 pandemic.

Analysts’ recommendations for Chipotle

Chipotle’s second-quarter earnings impressed analysts. After Chipotle reported its earnings, RBC raised its target price by $125 to $1,250, while Jefferies increased its target price by $100 to $1,100. Overall, analysts’ target price stands at $1,164.19, which is 1.8 percent below Chipotle’s closing price of $1,185.27 yesterday. Among the 35 analysts covering the stock, 48.6 percent suggest a buy, while 51.4 percent suggest a hold. None of the analysts recommend a sell.

Some analysts were bullish on Chipotle even before it reported its second-quarter earnings. The impressive results justified their bullish views. The rally in Chipotle’s stock price is not over. Investors should consider buying, even at these levels.

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