Back to top

Image: Bigstock

Chipotle (CMG) Banks on Digitization Efforts Amid High Costs

Read MoreHide Full Article

Chipotle Mexican Grill, Inc. (CMG - Free Report) is likely to benefit from digital initiatives, chipotlane add-ons and menu innovation. However, a decline in traffic from pre-pandemic levels as well as inflationary commodity and wage pressures is a concern.

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. 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 its Smarter Pickup Times technology rollout. 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.

Chipotle is also gaining from the rollout of Chipotlanes. During third-quarter 2021, the company opened 41 new restaurants, out of which 36 had Chipotlane in them. The 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.

Moreover, impressive comps performance continues to drive 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 the mid-double-digit range.

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 customers. Chipotle intends to emphasize on Tractor beverages, which is subject to normalization of the pandemic scenario. Nonetheless, increased focus on the stage-gate process, leveraging digital programs to expand access and convenience, frequent customer interaction through its loyalty program, menu innovation and operational excellence are likely to drive the company. These factors will help customers to resonate more with the company.

Concerns

Zacks Investment ResearchImage Source: Zacks Investment Research

Shares of Chipotle have declined 18.9% in the past three months compared with the industry’s 6.6% fall. The downside was caused by the coronavirus crisis. Pandemic-induced restrictions and labor challenges had taken an enormous toll on the company. Although the majority of dining services are open, traffic is still low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation on a regular basis to gauge the impacts of COVID-19.

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 that higher costs associated with beef and freight are a concern. An increase in labor costs is another headwind. Given the ongoing elevated wage inflation and 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 from the Zacks Retail-Wholesale sector include Arcos Dorados Holdings Inc. (ARCO - Free Report) , Genesco Inc. (GCO - Free Report) and Macy's, Inc. (M - Free Report) .

Arcos Dorados sports a Zacks Rank #1. It has long-term earnings growth of 42.9%. Shares of Arcos Dorados have increased 13.7% in the past three months.

The Zacks Consensus Estimate for ARCO’s 2022 sales and earnings per share (EPS) suggests growth of 10.4% and 255.6%, respectively, from the year-ago period’s levels.

Genesco sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 2,739.6%, on average. Shares of Genesco have surged 63.6% in the past year.

The Zacks Consensus Estimate for GCO’s 2022 sales and EPS indicates a rise of 35.6% and 673.7%, respectively, from the year-ago period’s levels.

Macy's currently sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 313.5%, on average. Shares of Macy’s have increased 104.3% in the past year.

The Zacks Consensus Estimate for M's 2022 sales and EPS suggests growth of 39.6% and 320.4%, respectively, from the year-ago period’s levels.