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Chipotle (CMG) Rides on Solid Comps Growth Amid Traffic Woes

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Chipotle Mexican Grill, Inc. (CMG - Free Report) is benefiting from solid comps growth, focus on digital capabilities, rollout of Chipotlane, strong liquidity and various sales building initiatives. However, dismal traffic and rise in operating expenses remain concerns. Let’s delve deeper.

Growth Drivers

Impressive comps performance continues to drive growth. Despite the pandemic, the company reported comps growth for the third straight quarter. Comps in the first quarter increased 17.2%, following growth of 5.7% in the fourth quarter of 2020. Notably, reopening of dining rooms, introduction of new menu items, effective marketing strategies and strong digital sales contributed to the company’s performance. Going forward, it anticipates comps in the range of the high 20% to 30% for the second quarter of 2021. Notably, it expects lower marketing investments and normalizing of quesadilla incidents for the upcoming quarter.

The company is also gaining from rollout of Chipotlane. During the first quarter 2021, Chipotle opened 40 new restaurants, out of which 26 had Chipotlane in it. Compared with non-Chipotlane restaurants, the digital gap (with Chipotlanes) were 15% higher during the quarter. The upside was primarily driven by higher-margin digital pickup orders. Markedly, the addition of Chipotlanes enhanced customer access and convenience, and boosted new store restaurant sales, margins and returns. For 2021, the company expects more than 70% of its new openings to have a Chipotlane in it.

Chipotle has been working on a new pipeline for its menu offerings. In January 2021, the company launched Cauliflower rice that resonated well with consumers. During the first quarter, the company also launched quesadillas across the United States and Canada as an exclusive digital offering. Also, it is witnessing strong recall for carne asada. The company stated that it has several new products in the pipeline that are in the early-stages of consumer testing. The introduction of new items, solid marketing activities that include a combination of brand-building efforts as well as transaction-driving promotions, and advertising are likely to lead to steady inflow of new customers.

Chipotle, which shares space with Darden Restaurants, Inc. (DRI - Free Report) , Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) and Restaurant Brands International Inc. (QSR - Free Report) , has a strong balance sheet, which will help the company to navigate the current scenario. As of Mar 31, 2020, the company reported $1.2 billion in cash, restricted cash and short-term investments, compared with $1.1 billion in the previous quarter. Notably, the amount represents sufficient liquidity to cover short term obligations of $209.1 million (as of Mar 31, 2021).

Concerns

Although majority of dinning services are open, traffic is still low compared with pre-pandemic levels.  Given the volatility and uncertainty regarding the coronavirus impact, it has not provided its comparable restaurant sales growth guidance for 2021. Notably, the company is adhering to all guidelines provided by the CDC, FDA, state and local agencies to ensure safety of employees and guests. The steps include increased sanitization of high-touch, dense-traffic areas, providing masks to employees and a tamper-evident packaging seal.

Chipotle’s continued efforts to connect with customers in order to regain their trust and loyalty, and bring them back to its stores on the back of high marketing and promo expenses have been hurting profitability. Moreover, costs to support the company’s newly designed food safety program can weigh on the company’s margins. 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. During the first quarter, other operating expenses increased 16.9% year over year, owing to a surge in delivery fees.

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