Key Takeaways

  • Adjusted EPS was $3.76 vs. the $3.32 analysts expected.
  • Revenue were slightly higher than analyst expectations.
  • Same-store sales growth was higher than analysts estimated.
  • Digital sales rose sharply amid pandemic.

What Happened

Chipotle reported adjusted EPS that beat analysts' expectations for Q3 2020. Revenue narrowly beat expectations. Adjusted EPS decreased while revenue increased compared to the same quarter a year ago. Same-store sales growth exceeded analysts' expectations, but still marked a deceleration from the year-ago quarter. Digital sales continued their meteoric rise amid the COVID-19 pandemic. About 10 of Chipotle's restaurants remain temporarily closed due to the pandemic. The company's shares fell in after-hours trading.

(Below is Investopedia's original earnings preview, published October 19, 2020)

What to Look For

Chipotle Mexican Grill Inc.'s (CMG) digital transformation -- more digital transactions, delivery, and drive thru -- in recent years is being tested amid the COVID-19 pandemic. Store closures and other social-distancing measures led to falling revenue in Q2 for the restaurant chain, which specializes in fast-casual Mexican food. But the bright spot is that digital sales have been booming.

Investors will be watching to see how Chipotle is weathering the crisis when it reports earnings on October 21, 2020 for Q3 FY 2020. Analysts expect revenue growth to rebound sharply as adjusted earnings per share (EPS) decline at a dramatically slower pace compared to Q2, when earnings plummeted.

Chipotle's same-store sales growth also will be scrutinized by investors. The metric is used to gauge the chain's ability to generate increases in revenue at established restaurants as opposed to newer ones that have just opened. Analysts expect same-store sales to rise 7.3% year over year (YOY) after falling in Q2.

Despite falling revenue and plunging adjusted EPS in Q2, Chipotle's stock has soared, outpacing the broader market. The stock dove further than the rest of the market during the pandemic-induced crash that began in the latter half of February, but has since staged a major rebound. Chipotle shares have provided a total return of 62.7% over the past 12 months, far above the S&P 500's total return of 16.5%, as of October 16, 2020.

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

Beating analysts' expectations for adjusted earnings per share wasn't enough to keep Chipotle's stock from initially falling after issuing its Q2 FY 2020 earnings report. Adjusted EPS plunged 89.9% amid rising costs and revenue that fell 4.9% compared to the same quarter a year ago. It marked the company's largest earnings decline in at least four years and the first revenue decline since Q3 FY 2016, when Chipotle's sales were suffering from an E. coli food poisoning scandal linked to its restaurants in several states. 

The promising sign, though, was that digital sales grew 216.3% in Q2, accounting for 60.7% of total sales for the quarter. That was up from 18.2% of total sales in Q2 FY 2019. However, the increase in digital orders also led to higher delivery costs, stemming partly from free or discounted delivery throughout the quarter to help stimulate orders amid the pandemic. Chipotle's shares rebounded from the initial drop after releasing the report and since have risen to new highs.

Analysts expect results to improve in Q3 FY 2020 compared to Q2. Revenue is expected to rise 13.1% YOY as costs weigh heavily on earnings. Adjusted EPS will decline an estimated 12.9% YOY. For the full year, analysts forecast FY 2020 annual revenue growth of 7.0% as adjusted EPS falls 23.5%.

Chipotle Key Metrics
  Estimate for Q3 2020 (FY) Actual for Q3 2019 (FY) Actual for Q3 2018 (FY)
Adjusted Earnings Per Share ($) 3.32 3.82 2.16
Revenue ($B) 1.6 1.4 1.2
Same-Store Sales Growth YOY (%) 7.1 11.0 4.4

Source: Visible Alpha

Investors will also be looking for growth in Chipotle's same-store sales, also known as comparable-store sales. Chipotle considers same-store sales as all sales generated by restaurants that have been in operation for at least 13 full calendar months. It provides a metric that allows investors to gauge whether revenue is primarily being generated by a company's existing stores or from stores that have only opened within the past year. If most revenue growth is attributable to the opening of new stores, then existing stores are failing to generate new demand. That means that total revenue growth will likely stall if the company stops opening new stores.

Chipotle's same-store sales declined 9.8% YOY in Q2 FY 2020, the first decline since Q4 FY 2016. In Q1 FY 2020, same-store sales grew 3.3%. Analysts are expecting same-store sales to rise 7.1% YOY in Q3 2020. That represents a nearly 17 percentage point improvement from the 9.8% decline in same-store sales in Q2. But that estimated growth for Q3 also is still far slower than 2019, when quarterly growth ranged from 9.9% to 13.4%.