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Chipotle Retained at Neutral

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We maintain our Neutral recommendation on casual dining restaurants chain Chipotle Mexican Grill, Inc. (CMG - Free Report) . The company’s strong brand power, aggressive expansion efforts and improved productivity gains are very encouraging. However, cost inflation and uncertain economic conditions keep us on the sidelines at the current level.

Why the Reiteration?

Chipotle, the most recognized fast casual Mexican restaurant chain in the U.S., is famous for its signature burritos and tacos. The company, through its ‘Food With Integrity’ initiative seeks to provide sustainably-grown and naturally-raised products. The customers are fond of Chipotle’s naturally-raised ingredients, which helps drive traffic growth.

In addition to this, the company continues to expand its presence worldwide. It opened 150 and 183 new restaurants in 2011 and 2012, respectively, and has plans to unveil nearly 165-180 new units in 2013. Chipotle is also focusing on spreading its Asian style restaurants, namely ShopHouse Southeast Asian Kitchen throughout the U.S.

Recently, the company announced the launch of new ShopHouse units in premium states of the U.S. We believe that this concept will be an important long-term growth driver for the company, going ahead.

The Zacks Rank #3 (Hold) company’s new off-premise catering program launched in the first quarter of 2013 will contribute robustly to its business in the near future. Apart from this, Chipotle remains focused on driving comps through a range of other sales driven initiatives, including throughput enhancements, developing the workforce, launching new menu items and initiating a new marketing strategy.  

The company’s comps in the past two quarters grew only 3.8% and 1.0%, respectively, due to an uncertain economy and a difficult consumer-spending environment. We believe this sluggish growth in comparable store sales in the past few quarters might act as a headwind to its growth story.

Moreover, Chipotle is exposed to increasing food and beverage costs, which may hurt the company’s profitability, going forward. In 2013, management expects its operating costs to go up, following aggressive marketing and promotional initiatives, which will hurt its margins.

Other Stocks to Consider

Some other restaurant industry stocks with a favorable Zacks Rank include CEC Entertainment Inc. , AFC Enterprises Inc. and Bloomin' Brands, Inc. (BLMN - Free Report) . While CEC Entertainment carries a Zacks Rank #1 (Strong Buy), AFC Enterprises and Bloomin' Brands both carry a Zacks Rank #2 (Buy).

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