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Chipotle's 2020 Earnings Fall Short of Sky-High Expectations

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GuruFocus.com
·3 min read
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- By Margaret Moran

After the markets closed on Feb. 2, Chipotle Mexican Grill Inc. (NYSE:CMG) reported earnings results for the fourth quarter and full year of 2020.

Although the company continued its breakneck growth pace and met revenue expectations, it fell short of what analysts had predicted for earnings and comparable store sales, causing the stock to stumble in after-hours trading.


Earnings overview

In full-year 2020, GAAP earnings per share came in at $12.52 while adjusted earnings were $10.73 per share. Revenue was $6 billion, a 7.1% decrease from full-year 2019. Digital sales grew 174.1% and accounted for 46.2% of sales, with comps increasing 1.8% and the operating margin decreasing 310 basis points to 17.4% due to the lower margins of delivery orders.

For the quarter, GAAP earnings were $6.69 while adjusted earnings were $3.48, a 21.7% increase from the prior-year quarter. It should be noted that for both the full year and the quarter, the difference between GAAP and non-GAAP earnings is mostly due to income tax benefits. Revenue for the period increased 11.6% year over year to $1.61 billion. Analysts had been expecting adjusted earnings of $3.73 on revenue of $1.61 billion.

Comps increased 5.7% during the quarter, a slowdown from the third-quarter comps increase of 8.3%. Digital sales grew 177.2%, which was also down from the astonishing 202.5% digital sales growth recorded in the third quarter.

The quarter's restaurant-level operating margin was 19.5%, an improvement from 19.2% in the prior-year quarter. Margins benefitted from a 210 basis points decrease in food, beverage and packaging costs, which amounted to 31% of revenue.

"Expanding access and convenience through our digital ecosystem has kept the Chipotle brand relevant and with world class talent, an inclusive culture, strong business fundamentals and deep financial strength, we are well prepared to emerge even stronger post-COVID," Chipotle's Chairman and CEO Brian Niccol said.

Chipotle opened 61 new restaurants, including one relocation, and closed two stores during the fourth quarter. It opened 161 new restaurants in total during 2020, including six relocations, closing nine locations permanently.

As of the quarter's end, Chipotle's cash and equivalents stood at $1.1 billion with no debt and a $600 million untapped credit facility available should it be needed.

Looking forward

For 2021, Chipotle declined to give earnings and comps guidance. The company expects to open approximately 200 new locations in the upcoming year.

Chipotle's management has often said in the past that it believes it can more than double its store count of 2,710 to around 6,000 in the long term, with an estimated timeline of achieving this five years from now.

Valuation

Based on the GuruFocus Value chart, which takes into account the historical multiples the stock has traded at in the past (such as price-earnings), past returns, growth and future estimates of business performance, Chipotle is currently significantly overvalued.

Chipotle's 2020 Earnings Fall Short of Sky-High Expectations
Chipotle's 2020 Earnings Fall Short of Sky-High Expectations

Morningstar analysts currently estimate that the company will record earnings of $35.32 per share and revenue of $8.75 million in 2023, which just about keeps pace with the company's own growth goals.

Thus, in order to see continued share price gains, the company would need to maintain its price-earnings ratio of over 183 in the long term, or at least see its valuation multiples contract less than the rate at which its earnings grow.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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This article first appeared on GuruFocus.