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Here's Why You Should Retain Chipotle (CMG) in Your Portfolio

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Chipotle Mexican Grill, Inc. (CMG - Free Report) is poised to benefit from menu innovation, digital initiatives and solid comps growth. Also, emphasis on chipotlane additions bodes well. So far this year, shares of the company have rallied 24.2% compared with the industry’s 12.4% growth. However, pandemic-induced soft traffic and wage inflation are a concern.

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

Key Catalysts

Chipotle continues to focus on menu innovation to drive growth. During third-quarter 2021, the company benefitted from the solid performance of Quesadilla. Also, positive customer feedback were witnessed with respect to Smoked Brisket (limited time offering) across restaurants in the United States and Canada. 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 a steady inflow of new customers in the upcoming periods.

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Chipotle is leaving no stone unturned to make digital ordering more appealing to customers and highly efficient for restaurants. 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. There has been a significant increase in digital orders and guest satisfaction since the rollout of its Smarter Pickup Times technology. During third-quarter 2021, digital sales increased 8.6% year over year to $840.4 million. The company witnessed a rise in order-ahead transactions, owing to enhanced guest access and convenience.

The company is also gaining from the rollout of Chipotlanes. During third-quarter 2021, Chipotle opened 41 new restaurants, out of which 36 had Chipotlane in it. Digital gap for restaurants (with Chipotlanes) was 10-15% higher than non-Chipotlane restaurants. The addition of Chipotlanes’ enhanced customer access and convenience. The same also bolstered new-store restaurant sales, margins and returns. For 2021, the company expects more than 75% of its new openings to have a Chipotlane in it.

Chipotle continues to impress investors with robust comparable sales growth. Despite the coronavirus crisis, the company reported comps growth for the fifth straight quarter. During third-quarter 2021, comparable restaurant sales increased 15.1% year over year, following an increase of 31.2% (in second-quarter 2021), 17.2% (first-quarter 2021) and 5.7% (fourth-quarter 2020). Consistent strength in digital sales, solid recovery of in-restaurant sales and positive customer reception to new menu items contributed to the company’s results. For fourth-quarter 2021, the company anticipates comps growth in the low- to mid-double-digit range.

Concerns

Chipotle’s results in the coming quarters might get impacted by the emergence of the new coronavirus variant. The restaurant industry has been facing declining traffic for quite some time. Although the majority of dining services are open, traffic is still low compared with pre-pandemic levels. We believe that the coronavirus outbreak will continue to hurt traffic and sales in the coming quarter.

Chipotle has been continuously incurring increased expenses, which have been detrimental to margins. Although the company successfully navigated numerous industry-wide disruptions during third-quarter 2021, leading to a decline in food costs, it acknowledges the fact that higher costs associated with beef and freight are a concern. Also, a rise in labor costs are a concern. Given the ongoing elevated wage inflation and greater new unit openings, the company expects labor costs to be in the mid-26% range in fourth-quarter 2021.

Zacks Rank & Key Restaurant 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 Papa John's International, Inc. (PZZA - Free Report) , Noodles & Company (NDLS - Free Report) and Del Taco Restaurants, Inc. .

Papa John's currently carries a Zacks Rank #2 (Buy). The company benefits from its off-premise business model. Sales at off-premise business models have exceeded pre-pandemic levels. We believe that a boost in customer count coupled with targeted off-premise marketing will likely drive the channel’s performance in the upcoming periods.

Papa John's reported better-than-expected earnings in three of the trailing four quarters, the average surprise being 27.2%. The company’s fiscal 2021 earnings are likely to witness a surge of 142.9%. PZZA stock has gained 49.9% in the past year.

Noodles & Company carries a Zacks Rank #2. Robust comparable restaurant sales growth and increase in average unit volumes is favoring the company. In third-quarter 2021, average unit volumes climbed 16% year over year.

The Zacks Consensus Estimate for Noodles & Company’s current financial year sales and earnings per share (EPS) suggests growth of 22.5% and 196.6%, respectively, from the year-ago period’s levels. NDLS has returned 25.9% in the past year.

Del Taco carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 25.7%, on average. Shares of the company have gained 39.3% in the past year.

The Zacks Consensus Estimate for Del Taco Restaurants’ current financial year sales and EPS suggests an improvement of 7.2% and 30.6%, respectively, from the year-ago period’s levels.


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Chipotle Mexican Grill, Inc. (CMG) - free report >>

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