Chipotle Mexican Grill, Inc. (NYSE: CMG) reported their second quarter 2020 earnings with mixed results, causing the shares to trade lower after market.
Chipotle generated revenue of $13.65 billion, above analyst estimates by only 1.9% and lower by 5% year-over-year.
Earnings per share came in at $0.40/sh, above analyst consensus by 3%.
So revenue and earnings met expectations but EBITDA was a miss coming in at only $56.3M compared to street estimates 25% higher.
EBITDA disappointed due to higher delivery expenses, elevated beef prices, and temporary investments as a result of the virus including assistance pay and wage inflation.
The pandemic-led shutdowns nation-wide forced many restaurants including Chipotle to shut down dine-in operations for a time, but thanks to its technology infrastructure Chipotle’s digital sales rose by 216.3% and accounted for 60.7% of revenue in the quarter, up from only 25% last quarter.
Investors have bid up Chipotle’s valuation due to its technological advantage over other food peers though the stock is now looking stretched.
Lower YOY sales? Tell it to the Stock!
Chipotle’s technological investments prior to the pandemic have greatly helped them in operating at a sufficient capacity during the lockdown.
This has helped the company to minimize its revenue losses compared to its peers as shown below.
As a result, along with its “digital kitchens” which are food preparation areas within store kitchens dedicated for online orders, and their mobile app which was first introduced back in 2017, is quite invaluable to the company today.
This has allowed Chipotle’s shares to jump in on back of the tech rally, which has been boosted so much lately thanks to stay at home orders.
This case is not limited to Chipotle alone, another non-traditional “tech” company, Lululemon has also joined in on the hype ever since they acquired Mirror for $500M.
Mirror is an “at-home fitness” equipment that allows gym goers to work out at home instead, which is very convenient during the pandemic.
The following chart illustrates the correlation of Chipotle and Lululemon, and its growing divergence with its sector peers.
Additionally, the company has also extended their efforts in growing contactless sales generating services by recently announcing that they will open their 100th drive thru pick up lane later this month, and adding 10,000 more workers to their business.
Furthermore in terms of liquidity, the company boasts that it enjoys a cash buffer of $934.6M including short term investments, and no debt, along with a $600M untapped credit facility to ensure its survivability during the pandemic.
These factors together has enabled its forward price to earnings multiple to be worth at a much higher premium than its peers, as illustrated below.
However when considering the fact that certain states in the US has seen a new surge in virus cases, there is an underlying risk that Chipotle along with other restaurants regardless of their drive thru and online capabilities, might have to shut down their stores temporarily.
If this is the case, then Chipotle would be the most vulnerable to face a deeper stock price correction than its peers due to its astronomical rally since the march lows.
Therefore, it would be wise for investors to resist the urge in taking a bite out of this stock at these price levels until certain assurances will be given by health officials regarding the status of the pandemic.
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