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23 October 2020

Chipotle Earnings

After Wednesday trading hours in the US, Chipotle Mexican Grill (CMG) released its earnings report. Overall, the Q3 2020 results were positive, but had a drawback which affected the market’s response, causing the share price to fall 4% in afterhours trading.

Chipotle, an American restaurant chain with outlets also in the UK, Canada, Germany, and France, beat earnings expectations, but its growth in online sales, and therefore delivery growth, supressed profit margins. The company’s sales rose 14.1% in the third quarter of the year as digital sales more than tripled during that time. In addition, the company reported quarterly same-store sales growth of more than 8%.

Chipotle’s earnings per share were US$3.76 compared to the expected value of US$3.47. However, Chipotle reported that Q3 net income was US$80.2m, which is down from the US$98.6m reported a year earlier.

This can be isolated to a number of issues, mainly associated with the digital sales through its app rocketing. For the second consecutive quarter, digital sales more tripled, with CEO Brian Niccol stating that digital sales could exceed US$2.5bn this year, which would be more than double last year’s figures. Delivery service revenue accounted for 1.3% of the company’s net sales. This revenue refers to the delivery and service fee paid by the consumer when ordering through the apps. However, the company has stated that this fee does not cover the commission fees which it pays to third-party delivery services, such as DoorDash and Grubhub.

As people receive food via delivery rather than sitting in restaurants, many of the profit drivers are not in high demand, such as drinks which have a considerable profit margin. It is understandable that drinks sales would fall, as people purchase the same branded drinks that are sold at Chipotle, but at a supermarket discount. The company also stated that there were increased orders of steak, contributing to higher costs in the period, however such increases partially were offset by a menu price increase and reduced usage of condiments, such as salsa and lower costs of avocados

The company is still displaying clear signs of growth by opening 44 restaurants and only closing three during the quarter. Therefore, it could be expected that once Chipotle grasps a better cost-pricing strategy to increase margins when delivery sales are higher, there may be some more positive earnings calls in the future.

Founded as recently as 1993, Chipotle generates a large proportion of its revenue at home in the US through its 2,676 restaurants. When the California-based company went public in 2006, McDonalds owned a 90% share of the company, contributing to its recent growth and franchise business model.

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Chipotle Earnings
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