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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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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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