Chipotle's growth prospects remain strong, even with higher menu prices
Consumers still see Chipotle as a value play over its fast-casual peers.
That chicken burrito with guacamole is soon going to cost a little extra, but that isn't likely to deter loyal Chipotle fans.
After announcing a pause earlier this year, the global burrito chain plans to raise prices again for the fourth time in two years. Its chief corporate affairs officer Laurie Schalow said in a statement to Yahoo Finance that the company is making the increase to offset inflation.
While the company hasn't said when or how much prices will increase, many on the street speculate it will be roughly a 3%-3.5% increase in the middle of Q4 when an updated menu typically comes out.
This comes as commodity prices are sticky, with "ongoing pressure" around the price of avocados, beef, and chicken, Citi Analyst Jon Tower said on a phone call with Yahoo Finance.
He said another factor could be to get ahead of California's Fast Food Accountability and Standards Recovery Act, known as the FAST Act, which moves the minimum wage up to $20, effective April 1, 2024.
Though the move may put a sour taste in consumers' mouths, they'll still show up.
"A $13 burrito at Chipotle is more appealing in this environment than an $18 salad for instance at Sweetgreen," TD Cowen analyst Andrew Charles said to Yahoo Finance over the phone.
"[Chipotle's] value perceptions are outpacing its peers," he said, which include Panera, Shake Shack (SHAK), Cava (CAVA), Starbucks (SBUX), and Sweetgreen (SG). As consumers opt for quick service instead of casual restaurants due to inflation and tighter wallets, Chipotle is poised to gain additional market share, similar to what it did in 2008 and 2009.
And while price is a factor, convenience also plays a role, according to Tower. The company is investing in digital capabilities like mobile orders and its drive-thru concept, Chipotlanes. Upping its digital capabilities will also enable the company to get more customer data.
During Q2, digital sales made up 38% of Chipotle's total food and beverage revenue. Of the 47 new restaurants it opened, 40 locations included a Chipotlane.
This year, the company plans to open 255 to 285 new restaurants, and 10-15 existing locations will add a Chipotlane, which Charles said tends to have a higher digital and sales mix, calling it a "win-win-win."
Is now the time to buy into Chipotle? Perhaps.
In the past month, shares of Chipotle are down nearly 8% as it closed at $1,781.48 on Friday. In the last five years, its shares are up more than 300%.
Tower, who has a buy rating, recently lowered his price target to $2,260 from $2,391. Both the S&P 500 and restaurant foot traffic were flying high in the summer, but they have since moderated, he said.
In September and early October, foot traffic at Chipotles increased, but at a lower rate, according to Citi Research, which cites data from Placer.ai. For example, during the week ending July 16, foot traffic jumped 12.3% compared to a year ago, but in the last week of September, that increase was 3.9%.
Though Chipotle trades at a premium compared to its peers, Tower said the current price is still a very attractive entry point, given the company's history of gaining additional market share.
The company has also been investing in expansion. In North America, it has set a long-term target of 7,000 restaurants. As of the end of Q2, there were more than 3,200. In July, Chipotle announced its first-ever development agreement to open locations in the Middle East and accelerate its international efforts early next year.
The "long-term possibilities" are there, Tower said, especially when it comes to new stores. It is on the "precipice" of expanding its presence, which will create increasing value over time.
Throughput — how fast a Chipotle store can get customers in and out of stores — should improve with new technology in the works, such as Chippy and Autocado. A robot food assembly line could also unlock value.
And the expansion of Chipotlanes could open up the restaurants to fulfill additional demand or create new features. A pivot to offering a breakfast menu is a possibility, said Tower.
Imagine that: breakfast burritos, tacos, bowls, and maybe even avocado toast.
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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