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Chipotle (CMG) Banks on Digital Efforts, Hurt by High Costs

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Chipotle Mexican Grill, Inc. CMG is poised to benefit from digital initiatives, chipotlane add-ons and menu innovation. Also, focus on the stage gate process bodes well. In the past three months, shares of the company have rallied 39.7% compared with the industry’s 4.6% growth. However, pandemic-induced soft traffic and wage inflation are concerns.

Let us discuss the factors highlighting why investors should retain the stock for the time being.

Zacks Investment Research
Zacks Investment Research


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Key Catalysts

Chipotle is leaving no stone unturned to make digital ordering more appealing to customers and highly efficient for restaurants. Notably, the company has redesigned and simplified the online ordering site, enabled online payment for catering and collaborated with several well-known third-party providers for delivery. There has been a significant increase in digital orders and guest satisfaction since the rollout of its “Smarter Pickup Times” technology. During second-quarter 2021, digital sales increased 10.5% year over year to $ 916.5 million. The company witnessed a rise in order ahead transactions, owing to enhanced guest access and convenience.

The company is also gaining from the rollout of Chipotlanes. During second-quarter 2021, Chipotle opened 56 new restaurants, out of which 45 had Chipotlane in it. Notably, digital gap for restaurants (with Chipotlanes) were 15% higher from non-Chipotlane restaurants. The addition of Chipotlanes enhanced customer access and convenience. The same also bolstered new store restaurant sales, margins and returns. For 2021, the company expects more than 70% of its new openings to have a Chipotlane in it.

Moreover, impressive comps performance continues to drive growth. Despite the pandemic, the company reported comps growth for the fourth straight quarter. Comps in the second quarter increased 31.2%, following growth of 17.2% in first-quarter 2021. Consistent strength in digital sales, solid recovery of in-restaurant sales and positive customer reception to new menu items contributed to the company’s results. For third-quarter 2021, the company anticipates comps growth in the range of low-to-mid double digits.

The company stated that it has several new products in the pipeline that are in the early-stages of consumer testing. The introduction of new items, solid marketing activities that include a combination of brand-building efforts as well as transaction-driving promotions and advertising are likely to lead to steady inflow of new customers. Chipotle is likely to emphasize on Tractor beverages, which is subject to normalization of the pandemic scenario. Nonetheless, increased focus on the stage gate process, leveraging digital programs to expand access and convenience, frequent customer interaction through its loyalty program, menu innovation and operational excellence are likely to benefit the company going forward. Notably, these factors will help customers to resonate more with the company.

Concerns

Chipotle’s results in the coming quarters might get impacted by the Delta variant. The restaurant industry has been facing declining traffic for quite some time now. Although the majority of dinning services are open, traffic is still low compared with pre-pandemic levels. We believe the coronavirus outbreak will continue to hurt traffic and sales in the coming quarter.

Moreover, Chipotle has been continuously incurring increased expenses, which have been detrimental to margins. During the second quarter, the company reported wage inflation (for a month) and high costs associated with new menu items and avocados. The company increased average wages to $15 per hour.

Zacks Rank & Key Picks

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

Some better-ranked stocks in the same space include Papa John's International, Inc. PZZA, Darden Restaurants, Inc. DRI and Jack in the Box Inc. JACK, each currently carrying a Zacks Rank #2.

Papa John's 2021 earnings are expected to increase 122.9%.

Darden has a three-five-year earnings per share growth rate of 10%.

Jack in the Box has a trailing four-quarter earnings surprise of 26.4%, on average.


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Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report

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Papa Johns International, Inc. (PZZA) : Free Stock Analysis Report

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