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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 likely to benefit from digital efforts, Chipotlane add-ons and menu innovation. Also, focusing on human capital technology bodes well. However, pandemic-induced supply chain disruptions and inflationary pressures remain concerns.

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. Since its Smarter Pickup Times technology rollout, there has been a significant increase in digital orders and guest satisfaction. Digital sales contributed 41.9% to sales during the during first-quarter 2022. The company witnessed a rise in order-ahead transactions, courtesy of enhanced guest access and convenience. This and Chipotlanes’ add-ons drove its performance.

Chipotle is also gaining from the rollout of Chipotlanes. During first-quarter 2022, Chipotle opened 51 new restaurants, including 42 Chipotlanes. The addition of Chipotlanes enhanced customer access and convenience and bolstered new store restaurant sales, margins and returns. It continues to expand its digital drive with Chipotlanes. Backed by impressive unit economics and the success of small-town locations, the company anticipates operating more than 7,000 restaurants over the long term in North America. CMG emphasized building a real estate pipeline with more than 80% of the restaurants having Chipotlane.

The company has been focusing on human capital technology to enhance its restaurant team member experience, paving the path for a more efficient, consistent and compliant environment. During first-quarter 2022, the company initiated testing an autonomous kitchen assistant — Chippy — that integrates culinary traditions with artificial intelligence to make tortilla chips. The initiative involves robotics collaboration, thereby allowing the company to focus on other culinary tasks in the restaurant without sacrificing the quality and deliciousness of the item. The company plans to implement the initiative in a Southern California restaurant and leverage it with the stage-gate process before deciding its future course of implementation.

Chipotle has been working on a new pipeline for its menu offerings. During the first quarter of 2022, the company benefited from the solid performance of Pollo Asado. It also unveiled new variations to its health-oriented Lifestyle Bowls that resonated well with consumers. Also, it is witnessing a strong recall for Plant-Based Chorizo (limited time offering). 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 and solid marketing activities that include a combination of brand-building efforts and transaction-driving promotions and advertising are likely to lead to a steady inflow of new customers. The company is likely to emphasize on Tractor beverages, which are 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 the loyalty program and menu innovation, unit expansion and operational excellence are likely to benefit the company. Notably, these factors will help customers to resonate more with the company.

Concerns

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Shares of Chipotle have declined 23.2% in the past six months compared with the industry’s 18.7% fall. The downside was caused by the coronavirus crisis. Pandemic-induced restrictions and labor challenges had taken an enormous toll on the company. Although most dining services are open, traffic is still low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation regularly to gauge the impacts of COVID-19.

Chipotle has been continuously incurring increased expenses, which have been detrimental to margins. Like other industry players, the company has been facing significant supply chain challenges and inflation across most commodities and categories. During first-quarter 2022, food, beverage and packaging costs, as a percentage of revenues, increased 100 basis points (bps) year over year to 31%. The upside was primarily caused by a rise in beef, paper and avocado costs. Labor costs (as a percentage of revenues) during the quarter came in at 26.3%, reflecting an increase of about 140 basis points from the last year. This increase was driven by its strategy to bolster average nationwide wages to $15 per hour. For second-quarter 2022, the company anticipates labor costs to be in the mid-24% range.

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 Zacks Retail-Wholesale sector are MarineMax, Inc. (HZO - Free Report) , BBQ Holdings, Inc. and Cracker Barrel Old Country Store (CBRL - Free Report) .

MarineMax sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 32.8%, on average. Shares of the company have declined 23.8% in the past year.

The Zacks Consensus Estimate for MarineMax’s 2022 sales and earnings per share (EPS) suggests growth of 16% and 21.5%, respectively, from the year-ago period’s levels.

BBQ Holdings carries a Zacks Rank #2 (Buy). BBQ Holdings has a long-term earnings growth of 14%. Shares of the company have decreased 18.3% in the past year.

The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and EPS suggests growth of 46.1% and 67.6%, respectively, from the year-ago period’s levels.

Cracker Barrel carries a Zacks Rank #2. Cracker Barrel has a long-term earnings growth of 9.4%. Shares of the company have declined 37.8% in the past year.

The Zacks Consensus Estimate for Cracker Barrel’s 2022 sales and EPS suggests growth of 17.3% and 33.5%, respectively, from the year-ago period’s levels.


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