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Chipotle's YTD Shares Rally 88%: Should You Hold the Stock?

Zacks Equity Research

Chipotle Mexican Grill, Inc. CMG continues to work on enhancing food safety, customer experience and digital offerings. It is prioritizing its e-Commerce program to gain customer confidence as part of its digital innovation. However, high costs of operations have been weighing on the company.


In the second quarter of 2019, adjusted earnings of $3.99 per share surpassed the Zacks Consensus Estimate of $3.69 by 8.1%. The bottom line also grew 39% from the year-ago quarter, backed by increased revenues and strong operating margins. Meanwhile, earnings estimates for 2019 have been revised upward over the past 30 days, reflecting analysts’ optimism surrounding the company’s earnings potential.

Let us delve deeper into factors that suggest that you should hold on to the stock for the time being.

Sales-Building Initiatives Aid

Chipotle is working on strengthening its brand and driving sales by shifting its strategy from giveaways, discounts and rewards to new menu items, operational excellence, enhancement of guest experience by retraining workers, technology-driven convenience, and more aggressive brand marketing. Roll out of queso substantially spurred sales. Additionally, Chipotle has been working on a new pipeline for its menu offerings.

On Jan 2, the company launched its first menu innovation called Lifestyle Bowls for mobile and web orders that resonated well with consumers. It generated over 1.3 billion earned media impressions in the first few days of January. Recently, the company introduced new kitchen ovens, which are improving the quality of its latest Quesadillas.

Notably, it’s robust marketing activities, including a combination of brand-building efforts as well as transaction-driving promotions and advertising, are resulting in a steady inflow of new customers. For 2019, the company’s priorities will revolve around the five key initiatives namely, digital system investments such as pickup shelves, digitized make lines, loyalty and delivery; marketing programs focusing on cooking techniques; and menu innovation and operational excellence.

Meanwhile, the company is aggressively trying to make digital ordering more appealing to customers and more efficient for its restaurants to drive digital sales and retain customers. In the regard, Chipotle redesigned and simplified its online ordering site, enabled online payment for catering, customized online meals and collaborated with several well-known third-party providers for delivery.

The second quarter saw particularly strong traction in delivery sales. In the second quarter, digital sales grew 99% year over year. Digital sales totaled $262 million during the second quarter and represented 18.2% of sales.

Also, since the rollout of its “Smarter Pickup Times” technology, there has been a significant increase in digital orders and higher guest satisfaction. As the company’s digital orders are made on a second makeline, it allows it to deliver excellent throughput and enhance the experience of customers, who are increasingly shifting to digital ordering. As of now, Chipotle enabled digitized makelines in nearly 2,000 restaurants and expects to roll it out in all restaurants by the end of 2019.

Meanwhile, the company is pressing ahead with enhancing its delivery system. Delivery remains a key driver for its digital growth. In fact, delivery is now available for more than 95% of its restaurants.

Concerns

Chipotle’s continued efforts to connect with its customers to retrieve their trust and loyalty as well as bring them back to its stores on high marketing and promo expenses have been hurting its profitability. Moreover, costs to support the company’s newly designed food safety program can weigh on its margins. Also, implementation of food safety practices increased the amount of labor required to prepare and serve food, resulting in higher labor costs, which may continue to keep profits under pressure.

In the second quarter of 2019, food, beverage and packaging costs, as a percentage of revenues, grew 110 basis points (bps) to 33.7% due to increased costs of avocados and dairy products. General and administrative expenses rose 42.6% from the year-ago quarter.

Zacks Rank & Stocks to Consider

Chipotle currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the industry are Dave & Buster’s PLAY, Denny’s Corporation DENN and Dunkin’ Brands DNKN, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dave & Buster’s and Dunkin’ Brands’ earnings for the current year are expected to increase 1% and 4.8%, respectively. Denny’s Corporations’ earnings for the next year are expected to grow 8.3%.

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Click to get this free report Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report Denny's Corporation (DENN) : Free Stock Analysis Report Dunkin' Brands Group, Inc. (DNKN) : Free Stock Analysis Report Dave & Buster's Entertainment, Inc. (PLAY) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research