The Ratings Game: Chipotle will continue to invest millions in its digital business despite uncertainty from COVID-19

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The future may be uncertain because of the COVID-19 outbreak, but Chipotle Mexican Grill Inc. is preparing for whatever comes with $30 million to $35 million in capital expenditures planned each month.

The investment will go toward technology and new stores.

Jack Hartung, Chipotle’s US:CMG chief financial officer, said on the earnings call that the investment could be eliminated if necessary. However, with the digital business soaring, the company doesn’t see a need to pull back now.

“We are in a financial position with our balance sheet and no debt that we can invest in our future,” Hartung told MarketWatch early Wednesday. Chipotle reported first-quarter results after hours on Tuesday.

Hartung said the fastest-growing part of the business is digital. And when customers start using the company’s online capabilities, they continue to do so.

“What we have seen before Covid was that behavior is sticky,” he said.

Read:We have plenty of food, so why are the grocery store shelves so empty?

Chipotle reported an 8% increase in sales for the quarter to $1.4 billion, and adjusted earnings per share of $3.08, exceeding expectations.

Digital sales grew 81%, accounting for 26% of the business for the quarter. On the call, Chief Executive Brian Niccol said March digital sales rose 103% year-over-year, representing 37.6% of sales.

As the outbreak spread in the U.S. in mid-March, weekly same-store sales began to decline, down 34% to 35% for the weeks ending March 22 and March 29. Same-store sales were down around 30% at the beginning of April, and were down in the high-teens over the past week, adjusted for the Easter holiday, Hartung said on the call.

Digital is now about 70% of sales.

Part of the digital business is the order-ahead component, with customers able to drive up and pick up their orders using Chipotlanes. This is another area of investment, according to Hartung’s earnings call comments, with first-day sales at a new location in California nearing $15,000, one of the biggest of all time.

“As a result of the continued strong performance of Chipotlanes and less competition for new sites, we will seek an even greater proportion of Chipotlanes in our pipeline, which will enhance customer access and convenience and increase new restaurant sales, margins, and returns,” Hartung said, according to a FactSet transcript.

Hartung told MarketWatch the company has been securing sites, though construction is halted due to the pandemic.

Watch:How to pick restaurant stocks that will survive the looming crisis

Chipotle has $909.2 million in cash and equivalents as of March 31 and the company is working on a securing a revolving debt facility of $250 million to $500 million. The company is working on rent deferrals and abatements and has suspended its stock buyback program. Hartung told MarketWatch that there have been “very few furloughs,” with workers at closed stores largely relocated to another location.

About 100 locations are closed, mostly in malls and shopping centers.

The Justice Department announced on Tuesday that the Mexican fast-casual chain will pay the largest-ever food-safety fine, $25 million, for food-borne illnesses linked to its restaurants that sickened more than 1,100 people between 2015 and 2018.

Hartung said on the call that the company will pay $10 million on June 1 and $5 million every 30 days thereafter.

“These payments will unfortunately hurt our liquidity a bit, but we’re ready to put this old matter behind us,” he said on the call, according to a FactSet transcript.

In a conversation with MarketWatch, Hartung emphasized the measures the company has put in place over the years to improve food safety, including illness symptom checks that were being conducted before the coronavirus outbreak.

In a note titled “Cash Hoard and Improving Sales Trend Allow Management to Play Offense While Others Retreat,” BTIG reiterated its buy stock rating and $1,010 price target.

“While the current sales volatility makes earnings predictions challenging, we believe investors should focus their attention on the balance sheet, which provides ample liquidity should sales fail to recover quickly and allows the company to be opportunistic amid the disruption,” analysts led by Peter Saleh wrote.

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“We believe Chipotle is weathering the storm well and has an arsenal of initiatives including digital, loyalty and menu innovation (queso blanco, carne asada, cauliflower rice, brisket) to reignite traffic once this crisis passes.”

SunTrust Robinson Humphrey analysts maintained their buy stock rating but raised their price target to $946 from $841.

“Combined with dramatically higher digital sales (including from new customers), Chipotle could end up better positioned coming out of the COVID-19 crisis, than before, though we are not estimating that at this point,” analysts said.

Over the past month, Chipotle has seen the daily number of loyalty program registrations jump fourfold, Niccol said on the call, reaching 11.5 million.

“We believe leveraging the increase in Chipotle Rewards membership will be key to improving the same-restaurant sales trend as dine-in sales will likely recover at a more modest pace; we expect most restaurant chains will be cautious opening dine-in areas to full capacity,” wrote Stifel analysts.

Stifel rates Chipotle stock hold and raised its price target to $750 from $715.

Chipotle’s price target was also raised at Wedbush (to $870 from $860), KeyBanc Capital Markets (to $955 from $790) and JPMorgan (to $630 from $615).

Watch: Can companies keep up with the new demand of online grocery shopping?

“We believe a premium valuation is warranted as Chipotle is poised to exit this crisis in a position of strength given its strong balance sheet, technology leadership, and preferred tenant status that should allow it to have its pick of available real estate sites in the future,” wrote KeyBanc analysts led by Eric Gonzalez.

KeyBanc rates Chipotle stock overweight.

Chipotle shares jumped nearly 11% in Wednesday trading and are up 24.4% for the last year. The S&P 500 index US:SPX has slipped 3.8% over the past 12 months.

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