Chipotle Mexican Grill, Inc. CMG is poised to benefit from digitalization, menu innovation and unit expansion. Moreover, initiatives like redesigned online ordering site, online payment for catering and meal customizations bode well. In the past six months, shares of the company have rallied 25.3% compared with the Zacks Retail – Restaurants industry’s 21.7% growth.
However, dismal traffic due to the coronavirus pandemic along with rise in expenses related to delivery sales and elevated beef prices is concerning.
Let’s delve deeper.
In a bid to drive digital sales amid the pandemic, Chipotle continues to focus on its digital program. Notably, the company is leaving no stone unturned to make digital ordering more appealing to customers and more efficient for its restaurants.
Toward this, the company has redesigned and simplified its online ordering site, enabled online payment for catering, online meal customizations and collaborated with several well-known third-party providers for delivery. Also, there has been a significant increase in digital orders and guest satisfaction since the rollout of its “Smarter Pickup Times” technology. Moreover, the company is benefiting from its rewards program, comprising more than 15 million enrolled members.
During the third quarter, the company initiated the launch of its group ordering feature on Chipotle app, thereby boosting easy and frictionless user experience. In third-quarter 2020, digital sales soared 202% year over year to $776 million. Notably, digital sales represented 49% of sales during the quarter.
Meanwhile, the company increased focus on Chipotlanes. This not only enhances customer access and convenience but also increases new store restaurant sales, margins and returns. Compared to the sales figures of non-Chipotlane comp restaurants, sales of the most recent openings were 25% higher during the third quarter of 2020. Notably, the stellar performance of these formats have accelerated pivot toward Chipotlane sites. For the remaining of 2020, the company expects 60% of its new restaurants with a Chipotlane. It also expects 70% of its openings in 2021 to have a Chipotlane in it.
Also, the company is working on strengthening its brand and recovering 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. Additionally, Chipotle has been working on a new pipeline for its menu offerings.
For 2020, the company’s priorities will revolve around the five key initiatives, namely, use of stage gate process, leveraging digital programs to expand access and convenience, frequent customer interaction through loyalty program, and menu innovation and operational excellence. Notably, these factors will help customers resonate more with the company. Moreover, the company is focusing on unit expansion to drive growth.
Chipotle’s results in the coming quarters are likely to be impacted by the pandemic. The restaurant industry has been facing declining traffic for quite some time now. We believe the pandemic will continue to hurt traffic and sales in the coming quarters as well.
Moreover, Chipotle has been continuously shouldering increased expenses, which have been detrimental to margins. During the third quarter, the company witnessed a rise in expenses related to delivery sales as well as elevated beef prices. Also, implementation of food safety practices has increased the amount of labor required to prepare and serve food, resulting in higher labor costs that might dent the profit margin.
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 Brinker International, Inc. EAT, Del Taco Restaurants, Inc. TACO and Fiesta Restaurant Group, Inc. FRGI. Brinker sports a Zacks Rank #1, while Del Taco and Fiesta Restaurant carry a Zacks Rank #2 (Buy).
Brinker has a trailing four-quarter earnings surprise of 116.6%, on average.
Del Taco and Fiesta Restaurant’s earnings in 2021 are expected to surge 41.4% and 418.8%, respectively.
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