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Chipotle's (CMG) Strategic Efforts Bode Well, Cost Woes Linger

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The past six months have been rewarding for Chipotle Mexican Grill, Inc. (CMG - Free Report) . The stock has gained 55.9% compared with the industry’s 5.3% growth. The outperformance can primarily be attributed to robust comparable sales, various sales-building and strategic initiatives and restaurants opening. However, high costs remain a concern for the company. Let’s delve deeper.

Key Catalysts

Chipotle’s robust strategic efforts have helped it to deliver better-than-expected earnings in six of the trailing seven quarters. The company’s bottom line has surpassed the Zacks Consensus Estimate by an average of 7.1% in the preceding four quarters.

Furthermore, Chipotle is working on strengthening its brand and recovering sales by shifting its strategy from giveaways, discounts and rewards to new menu items, operational excellence and enhancement of guest experience by retraining workers, technology-driven convenience, and more aggressive brand marketing.

Meanwhile, its roll-out of queso has substantially spurred sales. In the second quarter of 2018, comps rose 3.3%, driven by an increase in average check, including 4% benefit from menu price increase and customers adding queso. For 2018, management expects comps to grow in the low to mid-single digits, comparing favorably with the prior guidance of comps growth in low-single digits. The company continues to expect launching 130-150 restaurants this year.

As a part of its digital innovation, this Zacks Rank #3 (Hold) company is also prioritizing its e-Commerce program to gain customer confidence. Chipotle is aggressively trying to make digital ordering more appealing to customers and more efficient for its restaurants in order to drive digital sales and retain customers.

To this end, Chipotle 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. Till date, delivery is available from 1,700 Chipotle restaurants. The company targeted to reach 2,000 restaurants by the year end.

In the second quarter, the company made new records as digital sales mix was 10.3% of sales and grew 20% year over year. Digital sales too improved 33% on a year-over-year basis. Also, since the rollout of its “Smarter Pickup Times” technology, there has been a significant rise in digital orders and increased guest satisfaction.

As Chipotle’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.

 

Concerns

Chipotle continued efforts to connect with its customers in order to retrieve their trust and loyalty as well as bring them back to its stores backed by high marketing and promo expenses might hurt its profitability. Moreover, costs to support the company’s newly designed food safety program may dent the company’s margins.

Also, implementation of food safety practices has increased the amount of labor required to prepare and serve food, resulting in higher labor costs. This, in turn, is likely to keep profits under pressure.

Further, Chipotle operates in the retail restaurant space that is highly dependent on consumer discretionary spending. Notably, consumers’ propensity to spend largely depends on the overall macro-economic scenario. Although higher disposable income and increased wages are favoring the industry right now, it might change with the slightest disruption in the economy.

Key Picks

Some better-ranked stocks in the same space are Carrols Restaurant Group, Inc. (TAST - Free Report) , Dine Brands Global, Inc. (DIN - Free Report) and Darden Restaurants, Inc. (DRI - Free Report) . All the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Carrols Restaurant Group’s earnings have surpassed the Zacks Consensus Estimate by an average of 25%.

Dine Brands Global reported better-than-expected earnings in the trailing four quarters, with an average beat of 8.1%.

Darden Restaurants delivered better-than-expected earnings in the preceding four quarters, with an average beat of 3.1%.

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