Chipotle Mexican Grill, Inc. (CMG Quick QuoteCMG - Free Report) will likely benefit from digital initiatives, Chipotlane add-ons and culinary improvements. Also, the emphasis on menu innovation bodes well. However, inflationary pressures are a concern.

Let’s delve deeper.

Key Catalysts

Chipotle is leaving no stone unturned to make digital ordering more appealing to customers and increasingly efficient for restaurants. The company has 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 also been a significant increase in digital orders and guest satisfaction since the rollout of its “Smarter Pickup Times” technology. Digital sales contributed 38% to sales during second-quarter 2023. To drive growth, the company emphasizes testing changes to the smarter pickup times logic (based on different sales and deployment levels). The company also focuses on robotics-based autonomous vehicles for delivery, which will likely enhance the customer experience in the upcoming periods.

Chipotle recently announced a collaboration with Vebu, a product development company, to introduce Autocado. The robot prototype is designed to cut, core and peel avocados for the restaurant's signature guacamole. With the initiative, the company aims to improve processing speeds and reduce guacamole prep time by 50%. This will allow employees to focus more on serving guests and providing excellent hospitality. The precision processing capabilities of Autocado can increase avocado fruit yield, aligning with Chipotle's sustainability goals and potentially saving millions of dollars in annual food costs.

Chipotle continues to focus on the addition of Chipotlanes to drive growth.  During the second quarter of 2023, Chipotle opened 47 new restaurants, with 40 locations, including a Chipotlane. The addition enhanced customer access and convenience and bolstered new store restaurant sales, margins and returns Backed by impressive unit economics and the success of small-town locations, it anticipates opening between 255 and 285 restaurants in 2023, with more than 80% of the restaurants having Chipotlanes in them.

Chipotle is consistently focusing on menu innovation to drive growth. During the first quarter of 2023, the company announced the addition of Fajitas to its Quesadilla platform (as a permanent menu item) and reported a solid business with respect to the same. The addition was supported by the limited complexity of its restaurant operations. The company announced the global rollout of Chicken Al Pastor in the United States, Canada and Europe and reported solid customer feedback.

The introduction of new items and solid marketing activities that combine brand-building efforts and transaction-driving promotions and advertising are likely to lead to a steady inflow of new customers. CMG revealed that it has new menu items in the pipeline and that it intends to launch during third-quarter 2023.

Increased focus on culinary improvements bodes well. The company initiated the testing of a new grill to improve the overall cooking process for chicken and steak. Following the rollout in select restaurants, the company reported solid feedback with respect to the same. Meanwhile, the company initiated the rollout of new third-pan rice cookers. The initiative streamlines the rice cooking process with the ability to make white and brown rice at the same time. It also exhibits faster recovery time and less waste during non-peak periods. The company intends to roll out to 200 existing restaurants in 2023.

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In the past year, shares of the company have gained 9.5% compared with the industry’s 5.4% growth.

Concerns

Chipotle has been facing inflation across most commodities and categories. During second-quarter 2023, food, beverage and packaging costs were $738.7 million compared with $673.9 million, reported in the prior-year quarter. The upside was primarily driven by inflation across food costs, including dairy, tortillas, salsa, beans and rice.  The labor costs increased 11.2% to $611.7 million from the year-ago levels.

The company anticipates inflationary pressures to persist for some time. For third-quarter 2023, the company anticipates the cost of sales to be around 30% (owing to a rise in beef and avocado prices), while labor costs are expected to be about 25%.

Zacks Rank & Key Picks

Chipotle currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Zacks Retail-Wholesale sector are:

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The Zacks Consensus Estimate for BJRI’s 2023 sales and EPS indicates 5.6% and 423.5% growth, respectively, from the year-ago period’s levels.

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The Zacks Consensus Estimate for Arcos Dorados’ 2023 sales and EPS indicates 19% and 11.6% growth, respectively, from the year-ago period’s levels.

Chuy's Holdings, Inc. (CHUY Quick QuoteCHUY - Free Report) carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 26.6% on average. Shares of CHUY have increased by 61% in the past year.

The Zacks Consensus Estimate for CHUY’s 2023 sales and EPS indicate an increase of 9.5% and 32.9%, respectively, from the year-ago period’s levels.