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Can Chipotle (CMG) and Its Fast Casual Peers Revive a Dying Trend?

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It was only a couple of years ago that fast casual dining was the biggest trend in the restaurant industry. The dramatic shift to fast casual restaurants was mainly pushed by an increased interest, especially from millennials, in healthier food options that don’t break the bank.

This style of dining, which is a mix between traditional fast food restaurants and fine dining, saw its sales grow at a high rate of 10 to 11 percent annually from 2011 to 2016, according to research provider Euromonitor International

Riding off the highs of being at the center of the restaurant industry, a great amount of fast casual restaurants went public or saw share prices soar between 2013 and 2015, including Shake Shack (SHAK - Free Report) , Chipotle (CMG - Free Report) , Habit Restaurants (HABT - Free Report) , Potbelly (PBPB - Free Report) , Noodles & Company (NDLS - Free Report) , Zoe’s Kitchen , El Pollo Loco (LOCO - Free Report) , and Panera Bread.

At the forefront of this trend was Mexican chain Chipotle, the perfect answer to the younger generation’s desire for higher-quality ingredients with the same convenience of fast food. At its peak the company’s stock was at $758.61 per share on Aug 5, 2015 and looked to be destined to take over the entire restaurant industry—until disaster struck.

An E.coli outbreak in 2015 caused shares of the company to drastically fall and struggle to recover, with the stock closing 2017 at just $289.03.

Recent performance hasn’t looked that good for other fast casual restaurants either, as other main leaders, such as Noodles & Company, have struggled as well.  The restaurant which specializes in pastas, salads, and soups priced its IPO at $18 per share and ended that day at $36.75. Now, the company trades at only around $11, a 70% drop from its first day’s closing price. In 2017, the company reported a net loss of $37.5 million.

Drivers of the Downfall

Although food-borne illnesses were a major reason for Chipotle’s fall, there were other underlying factors that led to the steady demise of the company and the fast casual industry as a whole. Primarily, the fast food industry, once proclaimed dead by experts, has been able to fight back and again begin to take over the restaurant industry.

Typical fast food giants like McDonald’s (MCD - Free Report) have been able to respond to by providing new premium  and higher quality menu options, while still serving meals at a slightly lower cost than fast casual restaurants typically do.

The move by fast food restaurants to cater to new dining trends has made fast casual establishments lose much of their cultural significance, which is what drove most of their success initially. Fast food giants have also further countered and improved their relevance with younger generations through social media marketing.

An example is another classic fast food staple, Wendy’s (WEN - Free Report) , and the company’s frequent and popular use of Twitter responses to generate publicity.

How Fast Casual Can Rebound

The restaurants that were once all the hype can’t afford to simply depend on better ingredients anymore. New strategies need to be implemented that differentiate this style of dining from their fast food counterparts. The leader of the fast casual revolution, Chipotle, has already made steps towards that goal.

Newly appointed CEO Brian Niccol, who was previously the CEO of rival Taco Bell, recently stated goals of becoming not just a food brand but a “purpose-driven lifestyle brand”. In addition, Niccol aims to slowly start rolling in new menu options, increased mobile ordering, and a stronger social media presence.

The new CEO understands that the company can’t be stagnant in a market that is full of innovation.  All of the changes are meant to bring Chipotle back to center of attention for consumers, just as it was about three years ago.

Bottom Line

As the battle for the restaurant industry continues, investors should continue to wait to see what moves the leaders in the fast casual trend decide to make. This helps explain some of why Chipotle and Noodles & Company are both currently a Zacks Rank #3 (Hold).

There is clearly potential, as the Chipotle stock has risen more than 40% since Niccol took over on March 5. Its Q2 earnings report, which will be released on July 26, will be a vital indicator as to where the stock will go in the future and if Niccol’s strategic initiatives are truly paying off. 

Based on our Zacks Consensus Estimates, the company’s Q2 earnings are expected to move to $2.78 per share, a 19.8% surge from the year-ago period.

Make sure to check back here for more on Chipotle’s earnings outlook and the rest of the fast casual industry!

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