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Chipotle Gains From Digital Innovation Amid Competition

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Chipotle Mexican Grill, Inc.’s (CMG - Free Report) increased focus on food safety, and various sales-building and strategic initiatives are major positives amid a tough economic environment characterized by high costs and stiff competition. Recently, the company reported first-quarter 2018 results, wherein earnings surpassed analysts’ expectations while revenues were in line with the same. Adjusted earnings of $2.13 grew 33.1% from the year-ago quarter driven by higher revenues and lower food costs.

Chipotle had a good share of negative publicity throughout 2016 due to an issue of food-borne illnesses that surfaced toward 2015-end. As a safety measure, the company was forced to close several outlets. Ever since then, this fast-casual Mexican chain has been undertaking aggressive efforts to restore its economic model as well as regain customer trust. To this end, Chipotle discarded its earlier co-CEO model and recently appointed former Yum! Brands' (YUM - Free Report) executive, Brian Niccol as the new CEO. Niccol’s expertise in restaurant operations, digital technologies and branding has significantly helped Chipotle in first-quarter earnings.

Also, Chipotle’s shares have gained 49.8% in the past six months, outperforming the industry’s growth of 1.9%. Earnings estimates for the current year have also increased 2.3% over the past month, reflecting analysts’ optimism surrounding the company’s future earnings potential.

Increased Focus on Safety & Cleanliness to Drive Customers

As part of its revival strategy and efforts to regain consumer trust, Chipotle fulfilled its pledge of using no added colors, flavors or preservatives of any kind in all its ingredients. In fact, the company now makes use of only 51 real ingredients to prepare its food, which is in stark contrast to most other fast food chains. Chipotle is also focusing on developing new food-safety protocols that include DNA-based testing of several ingredients, coupled with changes in food preparation and food-handling practices. The company is also undertaking noteworthy steps to reduce the amount of food and packaging waste to be disposed in landfills and has increased its diversion rate from 31% in 2015 to 40% in 2017. Recently as announced, Chipotle is implementing practices like minimal food-waste disposal during the preparation process, recycling as well as compost programs for food packages, use of reusable lids replacing plastic wraps and participation in the Harvest Program to donate its leftover food to local communities.

Enhancing Digital Capabilities to Drive Sales

Chipotle is prioritizing its e-commerce program to appeal a greater number of customers and drive sales. To this end, the company has redesigned and simplified its online ordering site, enabled online payment for catering, online meal customizations and collaborated with several well-known third-party providers for delivery. In the first quarter, the company hit new records as digital sales mix was 8.8% of the total sales and grew 20% year over year. Also, since the rollout of its “Smarter Pickup Times” technology, there has been a significant increase in digital orders and higher guest satisfaction. As the company’s digital orders are made on a second make-line, it allows the company to deliver excellent throughput and enhance the experience of customers who are increasingly shifting to digital ordering.

In 2018, the company plans to accelerate the rollout of second make-lines, which will enable a faster, more accurate experience for digital customers and allow the restaurant crews to support higher sales volumes. The company expects at least 30% of its restaurants to be endowed with these new second make-lines by the end of 2018.

High Costs and Stiff Competition Remain Concerns

Chipotle’s continued efforts to connect with its customers in order to retrieve their trust and loyalty, as well as bring them back to its stores on the back of high marketing and promo expenses, have been hurting its profitability. Moreover, the company is incurring additional costs to support its newly-designed food safety program. In addition to wages, Chipotle is also facing high labor costs from training its workers to aptly implement food-safety practices.

Also, competition from fast-casual, quick-service and casual dining restaurateurs like BJ’s Restaurants (BJRI - Free Report) and El Pollo Loco (LOCO - Free Report) is expected to remain fierce with respect to price, food quality, service, location and concept, which may impact Chipotle’s operating margins and profits, going forward.

Chipotle currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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