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Chipotle stock deemed 'one of the most compelling' in the industry by Goldman Sachs

Goldman Sachs thinks Chipotle stock is a strong Buy despite the threat of a U.S. recession.

"We continue to view Chipotle as one of the most compelling growth stocks in the industry given the strong top-line (unit growth and same-store sales) and leading margin profile," Goldman Sachs analyst Jared Garber wrote in a client note on Tuesday.

Chipotle will report third quarter earnings on Oct. 25.

Analysts are bracing for a quarterly same-store sales increase of mid- to high-single digit percentage, reflecting more people returning to in-person dining. The company also lifted prices by 4% in August, which should have supported sales.

A Chipotle Mexican Grill is seen the day before it announces its first quarter results, in Los Angeles, California, United States, April 25, 2016. REUTERS/Lucy Nicholson
A Chipotle Mexican Grill is seen the day before it announces its first quarter results, in Los Angeles, California, United States, April 25, 2016. REUTERS/Lucy Nicholson

Chipotle CEO Brian Niccol said that the chain is thriving amid the economic slowdown by catering to more affluent households.

"Our brand is positioned in a really great spot," Niccol said at the Yahoo Finance All Markets Summit. "Obviously, we have some higher household income on average in our customers. We also skew younger but we serve pretty much all income groups. And I don't love to see some of the lower income groups being impacted the way they have, but we're fortunate that we're positioned the way we are with our commitment to food with integrity,"

Here are further details behind Goldman's call on Chipotle's stock:

Overview

  • Rating: Buy

  • Price Target: $1,840

  • Upside Assumed: +20%

Goldman's longer-term call on Chipotle is a combination of bullishness on opening new restaurants and pricing power in addition to continued menu innovation.

"We continue to view Chipotle as one of the most compelling growth stocks in the industry given the strong top-line (unit growth and SSS) and leading margin profile. Chipotle continues to leverage its strong digital foundation, premium protein LTO strategy to drive incremental traffic and average check (see analysis below on the new Garlic Guajillo Steak limited-time offering), and pricing power to offset inflation impacts and sustain already-strong restaurant level margins."

Easing inflation should also help support Chipotle's profit margins.

"Food cost pressure appears to be easing, room for possible margin upside. The price of several key commodity inputs for Chipotle have improve in recent months — including avocados and chicken thighs, and while chicken thighs were still inflationary throughout 3Q22, we are encouraged around the recent moderation and see this driving potential margin upside for 4Q. Overall, we see less risk that inflationary food costs will drive an earnings/margin miss for Chipotle in 3Q22/4Q22, and believe that the less inflationary environment does give the company more price cushion should they begin to see consumers becoming more price-conscious."

In terms of labor, Goldman noted that "the hiring/staffing environment appears to be easing and wage inflation levels are decelerating... With that being said, we do believe that there may be upside risk to labor margins should in-restaurant traffic continue to rebound (traffic was +3.5-4% in 2Q, and in-restaurant orders grew at ~35% year over year in 1H22) and should digital levels remain firm (low ~40% range). Restaurant throughput was a key topic of discussion during Chipotle's 2Q22 earnings call as the company works to improving onboarding and training for the vast amount of new employees hired over the last year, and we expect to be given an update on efficiency/labor initiatives currently underway as we see this as another underlying driver of same-store sales momentum as Chipotle recovers towards historical."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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