The Street Reacts To Chipotle's Q3 Earnings: Costs Heading 'In The Right Direction'

Chipotle Mexican Grill, Inc. CMG reported third-quarter results highlighted by a strong 14.1% sales growth but soaring demand for delivery is impacting profits.

Chipotle reported quarterly earnings of $3.76 per share, which beat the analyst consensus estimate of $3.40 by 10.6%. The company reported quarterly sales of $1.60 billion, which beat the analyst consensus estimate of $1.59 billion. Digital sales soared higher by 202.5% year-over-year and accounted for 48.8% of sales, of which half were delivery.

Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

Raymond James analyst Brian Vaccaro maintains a Market Perform rating on Chipotle's stock with no price target.

Morgan Stanley analyst John Glass maintains an Equal-weight rating on Chipotle with a price target lowered from $1,286 to $1,253.

Wedbush analyst Nick Setyan maintains an Outperform rating on Chipotle with a $1,600 price target.

Jefferies analyst Andy Barish maintains a Hold rating on Chipotle with a price target lifted from $1,000 to $1,200.

KeyBanc Capital Markets analyst Eric Gonzalez maintains an Overweight rating on Chipotle with a $1,475 price target.

Cowen analyst Andrew Charles maintains an Outperform rating on Chipotle with a price target lifted from $1,400 to $1,550.

Stephens analyst James Rutherford maintains an Equal-Weight rating on Chipotle with a $1,200 price target.

3 Key Takeaways

Chipotle's third-quarter report is highlighted by three key takeaways, Glass wrote in a note.

• Comps peaked at 8.3% in August and fell to a mid-single-digit rate in September
• Food and labor costs were "significantly favorable" versus estimates but Opex offset some of the benefits
• New store openings in the fourth quarter are expected to be consistent with third-quarter levels and 70% of new store openings in 2021 will have drive-through ("Chipotlane") capabilities.

Costs Heading 'In The Right Direction'

Cost of goods sold and labor expense of 32.3% and 25.3% were better than estimates of 33.3% and 26.9%, respectively, Setyan wrote in a note. However, "Other" OpEx of 16.8% was 140 basis points above estimates of 15.4% and marks an increase of 400 basis points in the third quarter due to a shift to delivery.

Management is testing the impact of higher delivery prices of 7%, 13%, or 17% at the majority of stores but management wouldn't comment on any system-wide rollout, the analyst said. But the company did confirm that it isn't seeing much of an impact from higher delivery costs in testing.

"We continue to believe that once higher pricing is rolled out, along with continued sales momentum and a continued shift to units with Chipotlanes, upside to both our and consensus estimates in out-years exists," Setyan wrote.

Q4 Trends 'Decent On Surface'

Chipotle's comps peaked in August and have been trending lower through October to date, Barish wrote in a note. The Street's consensus estimate of 6.9% comp in the quarter will likely come down although the company is still performing well on a two-year stack of more than 20%.

Jefferies' research is calling for fourth-quarter comps of 5%, 8% in 2021, and 3% in 2022.

Digital Outlook Is Strong

Digital sales more than tripled in the quarter and these transactions are sticky as Chipotle retained more than 80% of its gains since March as more than half of its in-store sales returned, Gonzalez wrote in a note. Despite an "explosive" surge in sales, there is reason to believe the company's digital outlook is "just getting started."

The rewards program boasts more than 17 million users and this represents an important source of customer engagement and personalization, the analyst said.

Cowen: Excited About Chipotlanes

Cowen's prior deep-dive research into Chipotlanes found that locations with a drive-through experience had a 58% Year 2 cash/cash return profile and this represents the best level since the pre-2015 food safety issue, Charles wrote in a note.

The economics behind the Chipotlanes represents an "exciting component" to Chipotle's long-term story.

Stephens: Elevated Expectations

Chipotle is delivering "eye-catching results" amid the COVID-19 pandemic but shares are trading near all-time highs and expectations are "clearly elevated," Rutherford wrote in a note. While the near-term picture is "less clear" given a large shift towards margin dilutive delivery orders, the longer-term picture is encouraging.

Image credit: Chis Potter, Flickr