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Here's Why Investors Should Retain Chipotle (CMG) For Now

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Chipotle Mexican Grill, Inc. (CMG - Free Report) is likely to benefit from digitalization, rollout of Chipotlanes and menu innovation. Also, focus on redesigned online ordering site, online payment for catering and meal customizations bodes well. However, rise in operating expenses along with a decline in traffic due to the coronavirus pandemic is a headwind.

Let us discuss the factors highlighting why investors should retain the stock for the time being.

Key Catalysts

Chipotle is leaving no stone unturned to make digital ordering more appealing to customers and highly efficient for restaurants. Notably, the company redesigned and simplified the online ordering site, enabled online payment for catering 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 first-quarter 2021, digital sales surged 133.9% year over year to $869.8 million. The company witnessed a rise in order ahead transactions, owing to enhanced guest access and convenience.

Moreover, the company continues to focus on the addition of Chipotlanes for the enhancement of customer access and convenience as well as improvement in new store restaurant sales, margins and returns. During 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) was up 15% during the quarter. The upside was primarily driven by higher-margin digital pickup orders. For 2021, the company expects more than 70% of its new openings to have a Chipotlane in it.

Meanwhile, 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 as well as enhancement of guest experience. Chipotle is retraining workers, adding technology-driven convenience and undertaking aggressive brand marketing.

Also, it has been working on a new pipeline for its menu offerings. During first-quarter 2021, the company 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. Moreover, the company is likely to emphasize on Tractor beverages, which is subject to normalization of the pandemic scenario.

Concerns

Zacks Investment ResearchImage Source: Zacks Investment Research

So far this year, shares of Chipotle have dropped 0.2% against the industry’s growth of 9.3%. The downside was primarily caused by the coronavirus pandemic. 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. We believe that the pandemic will dent traffic and sales in the coming quarters.

Meanwhile, Chipotle’s efforts to connect with customers in order to regain their loyalty and bring them back to stores through high marketing and promo expenses have been hurting profitability. Moreover, costs to support the company’s newly-designed food safety program might put pressure on 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 dent profits. During the first quarter 2021, other operating expenses moved up 16.9% year over year due to surge in delivery fees.

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 Dine Brands Global, Inc. (DIN - Free Report) , Texas Roadhouse, Inc. (TXRH - Free Report) and Ruth's Hospitality Group, Inc. (RUTH - Free Report) , each sporting a Zacks Rank #1.

Dine Brands’ 2021 earnings are expected to surge 269.3%.

Texas Roadhouse has a three-five year earnings per share growth rate of 10%.

Ruth's Hospitality has a trailing four-quarter earnings surprise of 81%, on average.

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