Chipotle (NYSE: CMG) Looks Unstoppable

2020 is a year that most restaurants would like to forget. Chipotle NYSE: CMG, however, is a notable exception. After watching its stock lose more than half its value in the early stages of the pandemic, Chipotle shares roared back, closing the year up 65.7%.

Chipotle’s performance can be largely attributed to its digital success. Just look at the numbers from the first three quarters of 2020:

Q1: Digital sales up 80% yoy to 26.3% of overall revenue.

Q2: Digital sales up 216% yoy to 61% of overall revenue.

Q3: Digital sales up 202% to 49% of overall revenue.

That small digital slowdown in Q3 was more than offset by Chipotle’s dine-in sales, as the company’s overall sales increased 14% yoy in Q3 vs. an overall sales decrease of 4.8% yoy in Q2.

On its Q3 earnings call, Chipotle said that, “Since sales troughed in late March, we've been able to retain 80% to 85% of our digital sales gains while recovering 50% to 55% of our in-store sales.” Moving forward, some, but not much, of the digital gains will be lost. But at the same time, in-store sales should approach 100% of pre-pandemic levels. That’s a recipe for high growth in 2021 and 2022.

Chipotle’s New Menu Items Give Customers What They Want

Chipotle has been testing two new menu items: cauliflower rice and quesadillas. CMG shareholders have reason to be optimistic about both.

Cauliflower rice will be a welcome sight for health conscious Chipotle customers. Chipotle’s signature cilantro lime rice is delicious, but it’s high in carbs. Cauliflower rice, on the other hand, is having a moment because it’s low in cards and high in antioxidants.

The company started testing cauliflower rice in July at 55 locations in Colorado and Wisconsin. At the time, Chief Marketing Officer Chris Brandt said that, “To date, one out of three new menu item requests from Chipotle customers is for cauliflower rice.” Though the rice costs an extra $2, it’s safe to say that most cauliflower loving Chipotle customers will be undeterred after years of shrugging off the extra charges for guacamole.

According to Chipotle, quesadillas are “the number-one requested new menu item by our customers.” Right now, quesadillas are only available as a digital option in a few markets. But Chipotle is “optimistic about the potential for quesadillas to be available nationwide at some point in the future.”

It’s still unclear when these promising new menu items will be rolled out nationally, but Chipotle isn’t one to twiddle its thumbs. You can be confident that the company is actively working to make cauliflower rice and quesadillas available across the world. When that time comes, it’s likely that Chipotle’s sales will get a nice boost.

Margins Will Improve Post-Pandemic

In Q3, Chipotle’s restaurant-level margin came in 19.5%. That was 130 basis points lower than Q3 2019, but Chipotle’s management estimates that COVID-19 was directly/indirectly responsible for 100 basis points of margin drag.

The COVID-related costs should be a thing of the past by sometime in the second half of 2021. Moreover, Chipotle is raising its menu prices, which will provide a boost to margins. And if cauliflower rice launches worldwide and a significant number of customers throw it on their burritos for $2 extra? Look out.

How Should You Play Chipotle?

After busting out to all-time highs in mid-December, Chipotle shares started to pullback around the holidays.

Volume has been light on the pullback, which is normally a good sign, but you might not want to read into it too much – volume is typically light in the last week of the year with many traders on vacation.

That said, Chipotle shares remain in an uptrend. Most importantly, the fundamentals are in place to justify a higher share price. Chipotle has very realistic plans to double its worldwide footprint and can feasibly continue to grow comps for years to come. Short-term weakness should be viewed as a potential buying opportunity.