Chipotle CMG announced today that it would be testing new restaurant designs as its digital sales continue to grow substantially. The Mexican food giant announced that restaurants in Chicago, Cincinnati, Phoenix, Newport Beach and San Diego will be part of the test.
Chipotle Attempts to Cater to Digital Growth
Some of the new features will include walk-up windows and different seating arrangements. The company will then decide what to roll out nationally based on transactions, consumer feedback, and its ability to incorporate new menu items.
Chipotle has actively rearranged its store designs in recent years to better accommodate its stores to service its growing digital orders. In 2016, the company started adding second assembly lines in its kitchens for digital orders and the project was recently finished earlier this year.
In addition, Chipotle has also planned to open between 150 to 165 new locations in 2020, with more than half including a “Chipotlane”, which is the company’s version of a drive-thru lane. Chipotle continues to launch these initiatives in an effort to further accelerate its growth in digital sales.
In Q3, the company’s digital sales rose over 87% and accounted for about 18% of its total revenue. In Q3 of fiscal 2018, digital sales rose about 48%. Shares of the company have nearly doubled this year sending its valuation higher as well, so, should investors look past the sky-high valuation and bet on this red hot fast-casual chain?
Late last month, Cowen analyst Andrew Charles upgraded Chipotle stock from "market perform" to "outperform," giving the stock a 12-month price target of $970, which was up from the previously targeted $800. Chipotle’s robust digital sales was at the forefront for the analyst’s bull case. This strong momentum in digital sales has been a major driving force in Chipotle's impressive comparable restaurant sales growth.
Chipotle’s rewards program that it launched back in March, is still in its infancy but shows great promise. By the end of Q2, rewards members numbered 5 million and by the end of Q3, the figure surged to hit 7 million. Chipotle CEO, Brian Niccol sees potential in this program “We expect this lever to become a bigger driver over time as we gain more experience gathering customer insight.”
The Chipotlane trials the company ran at some of its restaurants yielded encouraging results that has led to further development. Niccol commented “Digital business (at restaurants with a Chipotlane) is roughly 50% bigger and the driver of that additional growth is our order ahead business.” The continued innovative ability the company has showed to produce substantial growth through its digital prowess has investors anticipating a big performance in the upcoming year.
Our Zacks Q4 consensus estimates forecast earnings to soar over 55% to $2.67 per share and for net revenue to grow 13.9% to $1.4 billion. The company’s projected top-line gain would be just under the 14.6% growth it saw in Q3 and the projected bottom-line hike would represent a slowdown from the 77% growth in Q3.
Comparable store sales are estimated to come in at 9% in the fourth quarter, which would be down from the 11% growth seen in Q3.
Looking ahead to the full fiscal 2019 figures, our estimates call for earnings to increase 53% to $13.87 per share and for sales to jump 13.9% to $5.54 billion. Both of the projected top and bottom-line growth rates would outpace the growth reported in fiscal 2018 of 10% and 11%.
Comparable store sales are anticipated to reach 10%, which would be a significant markup from the 4% growth seen in fiscal 2018.
As for the elephant in the room, Chipotle’s projected growth does not come cheap. The stock currently trades at 46.8X its forward earnings, which is a significant premium to the industry average of 42.1X forward earnings. In addition, its PEG ratio of 3.03 and its price to sales ratio of 4.28 are both well above the industry averages of 2.21 and 0.87.
There is no denying the premium investors must pay to own a piece of the growing fast/casual restaurant. However, the company’s prolific returns have a strong chance of continuing in 2020 especially with the new features Chipotle plans to roll out next year. The potential success of these initiatives could very well bring the stock 14% higher to trade at the $970 target that Charles projected.
Chipotle has seen its earning estimates revised higher, helping earn CMG stock a Zacks Rank #2 (Buy).
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