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Why Is Chipotle (CMG) Up 5.4% Since Last Earnings Report?

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A month has gone by since the last earnings report for Chipotle Mexican Grill (CMG). Shares have added about 5.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Chipotle due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Chipotle Q2 Earnings & Revenues Top Estimates, Rise Y/Y

Chipotle reported solid second-quarter 2021 results, with earnings and revenues surpassing the Zacks Consensus Estimate. Moreover, the top and the bottom line increased on a year-over-year basis.

Q2 Earnings & Revenues Discussion

During the second-quarter 2021, adjusted earnings of $7.46 per share beat the Zacks Consensus Estimate of $6.46 by 15.5%. Moreover, the bottom line surged 1,765% from 40 cents reported in the year-ago quarter.

Meanwhile quarterly revenues of $1,892.5 million beat the consensus mark of $1,875 million by 0.9%. Also, the top line increased 38.7% on a year-over-year basis. The upside was primarily driven by strength in digital sales, rise in menu prices as well as new restaurant openings. In the quarter under review, Chipotle opened 56 new restaurants (including one relocation) and closed five, taking the total restaurant count to 2,853.

Digital sales increased 10.5% year over year to $916.5 million during second-quarter 2021. Notably, Digital sales contributed 48.5% to sales during the quarter. The company witnessed a rise in order ahead transactions, owing to enhanced guest access and convenience. This along with Chipotlanes add-ons drove the company’s performance.

During the second quarter, comparable restaurant sales increased 31.2% year over year, following growth of 17.2% (in first quarter 2021) and 5.7% (fourth quarter 2020). Consistent strength in digital sales, solid recovery of in-restaurant sales and positive customer reception to new menu items, contributed to the company’s results.

Costs, Operating Highlights & Net Income

During second-quarter 2021, food, beverage and packaging costs, as a percentage of revenues, declined 300 basis points (bps) year over year to 30.4%. The improvement can be attributed to benefits from menu price increases as well as lower beef price. However, this was partially offset by higher costs on account of avocado along with new menu items, such as quesadillas.

During the second quarter, restaurant-level operating margin came in at 24.5%, up from 12.2% recorded in the year-ago quarter. The uptick was primarily backed by leverage from the comparable restaurant sales growth, lower promotional activity as well as lower beef prices. However, this was partially offset by wage inflation (for a month) and costs associated with new menu items.

Adjusted net income in the reported quarter amounted to $212.8 million compared with $11.5 million in the prior-year quarter.

Balance Sheet

A strong balance sheet helps companies tide over the coronavirus-induced crisis. Chipotle had $1.2 billion in cash, restricted cash and short-term investments as of Jun 30. The company doesn’t have any debt.

Moreover, the company has access to $500-million credit facility to help it navigate through the crisis.

Inventory totaled $25.2 million as of Jun 30, 2021, down from $26.4 million as of Dec 31, 2020. Goodwill (as a percentage of total assets) came in at 0.3% at the end of second-quarter 2021.

During the second quarter, the company repurchased $145.3 million of stock at an average price of $1,408. Further, the management approved an additional $200 million (exclusive of commissions) to repurchase shares. As of Jun 30, the company had approximately $208.5 million available for the buyback program.

2021 Outlook

For third-quarter 2021, the company expects comps growth in the range of low to mid double digits.

The company expects to open nearly 200 new restaurants in 2021. However, the new openings might face minimal construction and permit delays due to the pandemic. Also, it expects 2021 tax rate in the range of 25-27%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Chipotle has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Chipotle has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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