Here's What Drive-Thrus Mean For Chipotle Investors

The fast-food industry continues to evolve with one main objective: serving customers how they want to be served. Gone are the days when customers can only place an order at the counter with a human. Instead, customers are making it clear in growing numbers orders must be placed through a machine inside a store or from a mobile device.

One restaurant in particular that's investing heavily in these initiatives is Chipotle Mexican Grill, Inc. CMG.

'Chipotlanes'

Chipotle started testing drive-thru lanes ("Chipotlanes") in early 2018 in which customers place an order through a mobile device and pick up their food through a standard drive-thru lane. The company is far from the first to offer drive-thru, but as a new initiative it's worthwhile to question if it will help accelerate sales.

Chipotle initially guided to opening "a few dozen" Chipotlanes at new locations. On Dec. 4, CEO Brian Niccol offered an update at a Barclays Conference. He said around 60 restaurants will have a drive-thru lane by the end of 2019 and will be featured in half of all new stores opened in 2020.

Management already guided to opening 150 to 165 new stores in 2020, so the math behind the guidance implies the company could end 2020 with approximately 135 to 143 stores offering drive-thru.

See Also: Chick-Fil-A Is The Slowest Drive-Thru In America For 2019

Should Chipotle Investors Care?

Chipotle is seeing encouraging early results from testing drive-thru lanes. Credit Suisse analyst Lauren Silberman said in a recent note restaurants with a Chipotlane generate higher overall sales and a higher average digital sales mix in the high-20% range. Management didn't disclose specific figures, but drive-thrus on average add an extra 20% to 30% in sales to individual restaurants.

The restaurant is likely aiming for 5% of all Chipotle stores offering drive-thru options by the end of 2020, the analyst said.

Still Smaller Than 2015

Chipotle is still a smaller company today and will remains so for the near term, at least based on a key sales metrics. Cowen analyst Andrew Charles said in late November Chipotle is unlikely to match 2015's peak average unit volume (AUV) of $2.5 million until 2021.

In other words, even with a growing fleet of drive-thru lanes in 2020, the average restaurant will see less volume next year compared to seven years ago. Does this warrant Chipotle's stock trading north of $800 per share after trading below $400 per share roughly the same time last year? Chipotle's AUV won't rise to $3 million until 2024, according to Charles' estimates. This implies the company grew AUV by 20% over a nine year period.

Other Metrics To Consider

Let's take a look at some other important metrics investors will be paying close attention to as Chipotle builds out a more digital friendly restaurant concept.

BTIG analyst Peter Saleh said in late October restaurants with a drive-thru lane typically generate 40% higher sales volume versus those which don't have drive-thru lanes. In Chipotle's case this could translate to $3 million in sales for stores with a Chipotlane -- but only once awareness is established. Eventually, stores with drive-thru could show superior margin structures in the mid-25% range versus the system average of around 21%.

"This suggests cash-on cash returns north of 80% for Chipotlane units and strongly supporting the decision to prioritize these units going forward," the analyst wrote.

Saleh's price target of $890 implies upside potential of around 10% -- a far cry from nearly doubling over the past year. Still, this is a decent return but may imply in part new investors won't fully benefit from Chipotle's digital growth strategy which is already well understood and expected.

Photo credit: Chis Potter, Flickr