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Here's Why Investors Should Hold on to Chipotle Stock for Now

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Chipotle Mexican Grill, Inc. (CMG - Free Report) is poised to benefit from menu innovation, digitalization and unit expansion. However, dismal traffic due to the coronavirus pandemic along with rise in food, beverage and packaging costs is concerning.

Let’s delve deeper.

Key Catalysts

Chipotle is working on strengthening its brand and recovering sales by shifting its strategy from giveaways, discounts and rewards to new menu items, operational excellence, enhancement of guest experience by retraining workers, technology-driven convenience, and more aggressive brand marketing.

The company is also working on a new pipeline for its menu offerings. Recently, the company announced the return of Carne Asada, to restaurants across the United States. The premium steak option will make its debut in France and also return to restaurants in Canada. The popular menu option is expected to drive the company’s top line going forward.

Moreover, Chipotle is focusing on expanding its digital program to drive growth during the coronavirus pandemic. In this regard, the company has redesigned and simplified its online ordering site, enabled online payment for catering, introduced online meal customizations and collaborated with several well-known third-party providers for delivery. Also, there has been a significant increase in digital orders and guest satisfaction since the rollout of its “Smarter Pickup Times” technology. During second-quarter 2020, digital sales soared 216.3% year over year to $829.3 million. Notably, digital sales represented 60.7% of sales during the quarter. Moreover, collaboration with all major third-party delivery aggregators such as Uber Eats and Grubhub is attracting new customers.

For 2020, the company’s priorities are likely to revolve around five key initiatives, namely, usage of stage gate process, leveraging digital programs to expand access and convenience, frequent customer interaction through loyalty program, menu innovation and operational excellence. Moreover, the company is focusing on unit expansion to drive growth. It expects to inaugurate 150-165 restaurants in 2020.

So far this year, shares of the company have rallied 50.7% compared with the industry’s 4.3% growth.

Concerns

Chipotle’s results in the coming quarters are likely to be impacted by the coronavirus pandemic. The restaurant industry has been facing declining traffic for quite some time now. We believe the pandemic will continue to hurt traffic and sales in the coming quarters as well.

Moreover, Chipotle has been continuously shouldering increased expenses, which have been detrimental to margins. In second-quarter 2020, food, beverage and packaging costs, as a percentage of revenues, decreased 40 basis points (bps) to 33.3%. It was primarily owing to lower avocado costs, increase in menu price in late 2019, and to some extent, reduced waste, freight, and paper costs.

Also, implementation of food safety practices has increased the amount of labor required to prepare and serve food, resulting in higher labor costs that may continue to keep profits under pressure.

Zacks Rank & Key Picks

Chipotle currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include BJ's Restaurants, Inc. (BJRI - Free Report) , Chuy's Holdings, Inc. (CHUY - Free Report) and Jack in the Box Inc. (JACK - Free Report) , each sporting a Zacks Rank #1.

BJ's Restaurants has a three-five year earnings per share growth rate of 15%.

Chuy's Holdings has a trailing four-quarter earnings surprise of 87.3%, on average.

Jack in the Box’s 2021 earnings are expected to surge 16.1%.

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