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Chipotle stores could reach digital $1M AUV in 2020: 3Q earnings report

As digital sales triple, comp sales increase by 8.3 percent despite lapping tough quarter

Chipotle Mexican Grill once again produced impressive third-quarter sales results, with comp(arable) sales increasing 8.3 percent. Total revenue jumped 14.1 percent compared to last year and resulted in $1,601.4M on the top line. Amid a health crisis that for many has correlated convenience with safety, digital sales increased 202.5 percent to $776.4M. Chipotle executives expect digital sales to reach $2.5B this year, putting average unit volume of store-level digital sales at the $1M mark.

What’s more, 48.8 percent of sales came from the digital channel (app, online ordering & third-party app) during the quarter. The Newport Beach, Calif.-based fast-casual chain increased its store count by 44, including 26 Chipotlane stores, its order ahead drive-thru-equipped restaurants. Compared to non-drive-thru stores, Chipotlanes typically outperform by 10 percent of sales. And delivery mix, which is less profitable, is reduced.

Diluted earnings per share totaled $2.82 in 3Q, an 18.7-percent decrease from the $3.47 posted last year. The $2.82 is net of a $0.94 after-tax impact from expenses related to certain legal proceedings, restaurant asset impairment and closure costs, as well as corporate restructuring and other adjustments, according to an announcement. Chipotle’s adjusted diluted earnings per share decreased 1.6 percent from last year with those one-time expenses factored out.

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Year-to-date revenue increased 5.6 percent to $4,376.9M. Net income decreased 49.9 percent to $164.8M. YTD operating income totaled $173.8M, a 40.7 drop from 2019, mainly due to higher operating costs and impairment charges related to the coronavirus. Adjusted diluted earnings per share dropped to $5.81, compared to last year’s $9.83.

Engaging customers, Carne Asada, resilient sales

Chipotle increased its loyalty members to 17M, providing a significant base of customers it has for captive marketing and targeting. Executives assert that the chain finds itself at the beginning of utilizing Chipotle Rewards as a sales funnel.

“Look, I think, the good news is we’re starting to get a lot of leverage out of that 17 million database,” said Brian Niccol, Chipotle chief executive on an earnings conference call. “And obviously, it’s served us very well, especially during kind of the environment where more traditional marketing channels probably haven’t had the viewership that they’ve had in the past.”

Thanks to its Carne Asada promotion, new customers are trying the product and moving on to try other menu items. This year’s promotion is lapping the same limited-time offer carried out last year. Menu price increases and menu-price testing have certainly benefited the top line. However, during last year’s quarter, comp sales increased 13.4 percent so this year’s 3Q comp sales of 8.3 percent is even more impressive.

Thanks to its Carne Asada promotion, new customers are trying the product and moving on to try other menu items. This year’s promotion is lapping the same limited-time offer carried out last year
The Carne Asada limited-time offer helps boost Chipotle’s third-quarter 2020 sales. Image by Chipotle Mexican Grill.

Delivery pain points

With the popularity of delivery, delivery-related costs have also gone up. Chipotle has been absorbing some delivery costs on the white label side (orders power by the Chipotle app). For example, a reduced delivery fee of $1, represents a 67% decrease on the pre-COVID delivery fee of $3. Price tests include raising menu prices 7 percent, 13 percent, to as high as 17 percent. Since the $2 reduction in delivery fee represents a double-digit percentage reduction against the order total, the effective menu price impact felt by the consumers amounts to only 2- to 3-percentage points, suggested Niccol.

The Mexican-style chain will also experiment with price increases on third-party apps, even though third-party pricing is higher. Delivery, whether run on the Chipotle app or by third-party app providers bears a significant cost. Chipotle is at a crossroads in determining whether all of these costs can be borne by the customer or are a cost of doing business.

Thankfully, slightly more than half of digital sales are for order-ahead pickup, which are much more profitable. The increase of Chipotlanes, which produce an increased sales volume and a lower mix of delivery orders is part of the equation that will have an impact on how digital continues to impact Chipotle’s margins. And the share of Chipotlanes versus traditional store openings is slated to increase from 60 percent to 70 percent in the near future.

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Food cost

Food and beverage costs during the third quarter improved by 90 basis points to 32.3 percent of sales, compared to last year’s same quarter. The fast casual reported that in addition to the menu price increases, lower avocado costs and decreased salsa usage and waste helped. However, they were offset by higher COVID-related expenses, higher beef costs, an increased use of steak, and fewer sales of higher-margin beverages.

Last year, Chipotle reported a 20.8 percent resaurant-level operating margin; this year, that dropped to 19.5 percent of sales. Higher COVID expenses (about 100 basis points alone), and the aforementioned food-related cost impacts are a big reason for the erosion. In addition, the delivery costs that have come with the higher digital sales are impacting the other operating expenses line.

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This article uses data from a Chipotle third-quarter earnings call and a script provided by Seeking Alpha.

Photo credit: Chipotle (featured preview, inline images)

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