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Chipotle Retained at Neutral

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We maintain our Neutral recommendation on restaurants chain Chipotle Mexican Grill, Inc. (CMG - Free Report) . Though we prefer the company’s strong brand potential and efforts to expand beyond the U.S., a sluggish restaurant industry keeps us on the sidelines at the current level.

Why the Reiteration?

Chipotle, which works within 2 higher-growth segments of the restaurant industry: the fast-casual and the Mexican food segments, is considered the most recognized restaurant in the U.S. Chipotle delivered positive comparable sales (comps) consistently in the past 4 quarters despite the recent economic downturn, which helped it to achieve a stable position in the industry.

In addition, Chipotle’s various proactive initiatives such as ‘Food With Integrity’ program, innovative marketing strategy, new catering and loyalty programs and food-quality enhancement agenda continue to spur growth. Chipotle expects that these initiatives will drive its comps growth in ensuing quarters.

Chipotle also remains steadfast in its goal to continuously expand its business globally. Since the company has 11 international stores across Canada, London and Paris, we believe it still has plenty of room to grow internationally. In 2012, the company unveiled183 new units, reflecting a 25% expansion over the past year. For 2013, the company plans to open 165 to 180 new restaurants worldwide.

However, Chipotle is concerned about increasing food and beverage costs. In this regard, the cost of beef and cheese remains a major concern and is currently showing no signs of stabilizing.

Moreover, although the industry is showing signs of improvement and restaurant operators are reporting positive traffic, the pace of economic recovery is slow and consumer spending remains low due to high interest rates and still-constricted credit availability.

Other Stocks to Consider

Some other restaurant industry stocks with a favorable Zacks Rank include Red Robin Gourmet Burgers Inc. (RRGB - Free Report) , Cracker Barrel Old Country Store Inc. (CBRL - Free Report) , both carrying a Zacks Rank #1 (Strong Buy), and Burger King Worldwide Inc. carrying a Zacks Rank #2 (Buy).

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