Chipotle Set to Aggressively Pursue Market Share
We plan to raise our fair value estimate to reflect future market share gains, but shares are still overvalued.
With Chipotle (CMG) posting exceptional January/February sales (comps up 14.4%, including 11% transaction growth) and weathering COVID-19 closures better than most restaurants (comps down 16% in March due to strong digital ordering engagement versus the 25%-40% decline we've seen for many quick-service/fast-casual operators), our focus now shifts from near-term disruptions to longer-term market share opportunities. Despite government assistance, we believe at least 30% of the 1 million U.S. restaurant locations are at risk of permanent closure in the next 12-18 months, which will leave narrow-moat Chipotle--as well as other wide- and narrow-moat restaurant names--primed to take advantage.
What gives us confidence in Chipotle? (1) The company is operating from a position of financial strength, with $909 million in cash and no debt at the end of the first quarter, access to a $250 million-$500 million credit facility if needed, and an additional $100 million from CARES Act tax deferrals. (2) Because of reduced labor hours due to an uptick in digital orders (70% of sales in April), Chipotle is posting break-even restaurant profits at comp declines of 30%-35% and break-even corporate EBITDA under the high teens comp declines it saw during the second week in April. (3) Digital ordering (including a 150% increase in delivery and 120% order-ahead) and loyalty program adoption should create greater customer engagement. (4) We expect the company to be aggressive filling restaurant real estate availability with its new Chipotlane formats, suggesting a meaningful acceleration in future restaurant openings. Finally, because of employee investments, including 10% assistance pay for crew and discretionary bonuses for managers, we expect Chipotle will face fewer staffing issues than other operators.
We plan to raise our $675 fair value estimate by 10% to reflect future market share gains. The shares still strike us as overvalued, but we don't see many downside catalysts on the horizon.
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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.