Shares of Chipotle (CMG 596.95, +70.89, +13.48%) have surged higher today, reaching
their highest levels since December 2015, after the company posted impressive
upside 4Q18 results after the close last night which featured its strongest
comparable restaurant sales growth of the year. In fact, its comp and revenue
growth has been steadily climbing higher over the past several quarters,
indicating that the food safety issues that plagued CMG earlier this year and
in 2017 may be behind the company now.
The improving results also speak well to CMG's hire of CEO Brian Niccol, who came over from rival Taco Bell (YUM) last March. As we discuss in more detail below, part of his strategy has been to invest in the restaurant's digital channel, and that decision is paying dividends for the company.
Additionally, the company has reinvigorated its marketing and advertising programs, including a highly successful free bowl delivery offer in December, which had a significant impact on the company’s comp growth. CMG expects this promotion to have a lasting effect beyond December since nearly half of the customers who took part in the promotion were new or lapsed users.
Finally, CMG has been able to offset higher labor costs by increasing its menu prices. Specifically, the company's average check was up this quarter thanks to a 3.3% benefit from menu price increases. That said, in 2019, more than 20 states will raise their minimum wage, and CMG is expecting a more modest 2% boost from menu price increases this year. During the earnings call last night, the CEO commented that he sees rising labor costs as one of its biggest challenges this year.
Review of 4Q18
CMG posted EPS of $1.72, crushing the $1.41 consensus, and growing by a solid 28% year/year. Revenue came in at $1.23 bln, also ahead of the $1.19 bln expectation, up 10.4% -- its strongest top-line growth rate since 2Q17. But the metric that really has investors excited was its +6.1% comp growth, which benefited from a combination of higher average checks and a 2% bump in restaurant transactions.
What's especially encouraging, though, is that the trend has been steadily rising over the past four quarters: 1Q18 at +2.2%; 2Q18 at +3.3%; 3Q18 at +4.4%, and then +6.1% this quarter. As we noted above, its free bowl delivery promotion in December was a major catalyst this quarter. So, the Q4 comp performance looks to be inflated by a one-off event. Additionally, the extremely cold weather that gripped much of the Midwest in late January threw a bit of a wrench into Q1 comps.
However, on the positive side, CMG did say that it saw some follow through into early January from its bowl promotion, and the company is lapping a relatively easy number from 1Q18.
The other metric that is garnering a lot of attention is the 65.6% surge in digital sales, pushing the channel to nearly 13% of total sales now. That also represents an acceleration from Q3's 48% jump in digital revenue. Moving forward, CMG has no plans to take its foot off the accelerator here, either, as it looks to invest $90 mln in digital-related initiatives this year.
Growth Catalysts Ahead, But Stock is Not Cheap
In its earnings press release, management projected mid-single digit comparable restaurant growth for FY19, virtually in-line with the +4.5% consensus estimate. CMG did not offer guidance for Q1 comps, but did express confidence that the underlying positive trends it saw in Q4 continued into Q1 -- only with the aforementioned weather-related issues clouding the picture.
It's clear, though, that the company sees its ongoing digital transformation as paramount to its growth strategy. It has already installed pick-up shelves for online orders in 1,000 of its restaurants, and by 2H19, the company hopes to have them in all of its restaurants. To accommodate the increase in online orders and keep traffic flowing in the restaurant, CMG is also adding second assembly lines in its kitchens.
Furthermore, CMG is testing drive-through windows at a handful of locations -- called "Chipotlanes" -- in order to increase overall restaurant traffic, while reducing order times inside. While it's early, the CEO commented last night that these drive-up windows have provided a lift to both digital and overall sales at those restaurants. If these trends continue, CMG will look to expand on its Chipotlane initiative.
On top of that, the company also plans to add another 140-155 new restaurants in 2019, which will be weighted towards 2H19.
There are a variety of potential growth catalysts ahead, which has investors excited about the stock's potential. But investors are also paying a hefty price for that potential, with shares trading at 50x estimated FY20 earnings. As a point of comparison, Yum Brands (YUM), the owner of Taco Bell, Pizza Hut, and KCF, is trading at 25x forward earnings. To be sure, CMG has been outperforming YUM by a wide margin for quite some time, so a premium multiple is warranted in our view. However, CMG shares being twice as expensive on a forward P/E basis seems rather excessive.
Key Takeaways: CMG's impressive results demonstrate that its turnaround plan is in full effect. Specifically, the new CEO's vision to focus on the digital channel has been the spark to reignite its growth. What has investors especially excited is that the company is only in the early innings of this transition towards online sales, which could eventually lead to drive through windows at many locations throughout the country. The company does face some risk from rising labor and food costs, especially since it implemented menu price increases last year and it may not want to rock the boat with another significant increase this year. Additionally, the stock is quite expensive and seems to be pricing in this improved growth outlook. All in all, though, it was an encouraging quarter for CMG as it looks to put those food safety woes completely in the rearview mirror.