After the market closed on April 21, Chipotle Mexican Grill (CMG, Financial) announced its earnings for the first quarter of 2020. Shares jumped 7.6% in after-hours trading following the news after closing at $780.
Wall Street analysts were expecting $1.42 billion in revenue and $2.90 in earnings per share for the quarter. The burrito chain missed estimates slightly with revenue of $1.41 billion and earnings of $2.70 per share, but these numbers represented growth of 7.8% and 7.7% from the prior-year quarter.
Comparable restaurant sales increased 3.3% compared to 13.4% in the fourth quarter of 2019, while digital transactions grew 80.8% following last quarter’s growth of 78.3%. Digital orders accounted for 26.3% of all sales for the quarter
Breaking down the results for the quarter by month, Chipotle’s sales grew 12.1% in January and 12.8% in February (excluding the 4.3% benefit from leap day on Feb. 29) before dropping 16% in March as shelter-in-place orders were implemented.
As of April 21, Chipotle has a market cap of $21.78 billion and a price-earnings ratio of 63.34. According to the Peter Lynch chart, the stock is trading slightly higher than its historical median valuation levels.
Contributors to growth
According to the numbers, digital sales were primarily responsible for Chipotle’s growth for the quarter. Chairman and CEO Brian Niccol commented the following on the earnings report:
"Investing in digital over the last several years has allowed us to quickly pivot our business with Q1 digital sales reaching our highest ever quarterly level of $372 million. Our strong brand, business model and balance sheet give us the confidence to not only weather this downturn but continue to judiciously invest in key areas so that when we come out the other side, we will emerge even stronger."
The strong balance sheet is another reason behind the company’s success. As of the quarter’s end, Chipotle has no debt on its balance sheet and $500 million in cash and cash equivalents, compared to $2.85 billion in debt and $481 million in cash and cash equivalents at the end of the previous quarter. The Altman Z-Score of 6.23 puts it firmly in the safe zone in terms of avoiding bankruptcy.
Due to its strong financial position, Chipotle was able to skip past the “applying for loans” step to quickly and efficiently pivot its operations as it adjusted to the new business environment. The company has suspended its share buyback program, increased employee pay by 10% (as hazard pay) and implemented stricter health and sanitization standards at its restaurants.
Chipotle also expects to see some benefits from legislation resulting from the Covid-19 pandemic. About $100 million in social security tax payments and accelerating tax depreciation will be deferred under the CARES act. In addition, the company was able to sign a Deferred Prosecution Agreement in regards to its food poisoning outbreak in 2015. The agreement stipulates that the government will defer the case for three years as long as Chipotle pays a $25 million fine and steps up measures to ensure compliance with local and federal food safety standards.
Looking forward
Chipotle withdrew its previously issued guidance for 2020 and did not provide a new outlook.
However, the company stated that it expects to be able to continue operating at depressed levels for a year before needing to consider taking on debt.
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 or consult registered investment advisors before taking action in the stock market.
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