Key Takeaways

  • Adjusted EPS was $0.40 vs. the -$0.18 analysts expected.
  • Revenue and same store sales declined by less than analysts expected.
  • Digital sales grew 216%, but not by enough to offset the in-store sales decline.

What Happened

Chipotle reported Q2 2020 earnings on July 22, 2020, and as a restaurant chain, Chipotle was hit hard by the lockdown throughout Q2. Adjusted earnings per share were much lower than last year, but they stayed positive and were higher than expected. Revenue fell 4.8%, which was less than expected but still a decline, and same store sales fell nearly 10%, though this was also less than expected. This was partially offset by a 216% increase in digital sales as the company works to move more business online.

(Below is Investopedia's original earnings preview, published July 14, 2020)

What to Look For

Chipotle Mexican Grill Inc. (CMG) has seen its stock rebound more than 130% from its low in mid-March, despite the COVID-19 health crisis that has shut down much of the U.S. economy. The reason: investors are optimistic that surging online orders for Chipotle items will offset plunging sales at the chain's dine-in restaurants, which remain closed. Despite economic openings in some regions of the U.S., Chipotle and the restaurant industry are continuing to reel from government-ordered social-distancing measures and other steps intended to slow the spread of the virus.

Investors will watch how well Chipotle manages these forces when it reports earnings on July 22 for Q2 FY 2020. Based on analysts' estimates, the news won't be good. Analysts expect the company to report a loss for the first time in at least 14 quarters as revenue and same-store sales fall sharply.

Investors will focus especially intently on the key metric of same-store sales, which is a critical measure of the chain’s underlying growth. Chipotle only stopped their dine-in service in March, the last month of Q1. So the full effects of the COVID-19 lockdowns and other measures are more likely to be seen in Q2, where analysts expect the first same-store sales decline in at least 14 quarters.

During the past 12 months, Chipotle has dramatically outperformed the broader market, posting a total return of 43.3% compared to just 4.7% for the S&P 500. Since its March lows, Chipotle stock has risen at more than double the pace of the broader market.

One Year Total Return for S&P 500 and Chipotle
Source: TradingView.

On April 21, the company reported better-than-expected Q1 FY 2020 earnings, driven in part by its growing online deliveries business, pushing up the stock sharply. To be sure, Q1 adjusted earnings per share (EPS) of $3.08 was down 9.4% from a year earlier, the first adjusted EPS decline in at least 13 quarters. But investors were optimistic because the adjusted EPS number beat the consensus estimate by 5.8%. Another positive sign was that revenue rose 7.8% YOY, even though that was a big deceleration from previous quarters.

Analysts don't expect the same positive signs in Q2 FY 2020. In their upcoming earnings release, analysts expect adjusted EPS to swing from $3.99 in Q2 FY 2019 to a loss of $0.18 in Q2 2020. Revenue is expected to plunge 8.9%. Given the larger-than-usual economic uncertainty and lack of visibility, these estimates may have a wider margin of error.

Chipotle Key Metrics
  Estimate for Q2 2020 (FY) Actual for Q2 2019 (FY) Actual for Q2 2018 (FY)
Adjusted Earnings Per Share ($) -0.18 3.99 3.05
Revenue ($B) 1.31 1.43 1.27
Same-Store Sales Growth YOY (%) -13.6 10.0 3.3

Source: Visible Alpha

As stated, the key metric investors may look at is Chipotle's same-store sales growth. Same-store sales, or comparable-store sales, is a key financial metric for restaurants and retail companies. It provides a measure of the total sales attributable to stores that have been in operation for a year or longer, or in Chipotle's case, for at least 13 full calendar months.

Chipotle's same-store sales have shown robust growth in the past two years after overhauling its operations in the wake of food poisoning outbreaks connected to restaurants in four states starting in 2015. This spring, the chain agreed with the U.S. Justice Department to pay a $25 million fine to resolve criminal charges.

Aided by steps to improve cleanliness at its stores, Chipotle's same-store sales rebounded from 1% growth in Q3 FY 2017 and peaked at 13.4% growth in Q4 FY 2019. That progress has reversed this year. Same-store sales rose by only 3.3% in Q1 2020 and analysts estimate a 13.6% decline in Q2.