Here's Why You Should Retain Chipotle (CMG) in Your Portfolio
Chipotle Mexican Grill, Inc. CMG is likely to benefit from digital efforts, Chipotlane add-ons and menu innovation. Also, focus on enhancing guest access and convenience bodes well. However, inflationary pressures and supply chain challenges pose concerns.
Let us discuss the factors highlighting why investors should retain the stock for the time being.
Key Catalysts
Chipotle is leaving no stone unturned to make digital ordering more appealing to customers and highly efficient for restaurants. The company redesigned and simplified the online ordering site, enabled online payment for catering and collaborated with several well-known third-party providers for delivery. Since its Smarter Pickup Times technology rollout, there has been a significant increase in digital orders and guest satisfaction.
Digital sales contributed 37% to sales during third-quarter 2022. The company witnessed a rise in order-ahead transactions courtesy of enhanced guest access and convenience. The company focuses on improving order accuracy and timing for its digital business. To this end, the company initiated the testing of advanced location-based technology to enhance the Chipotle app functionality and provide a seamless, convenient experience for its guests. This includes utilizing real-time data and order readiness messaging, wrong pickup location detection and reminders to scan the Chipotle Rewards QR code to checkout.
Chipotle is also gaining from the rollout of Chipotlanes. During third-quarter 2022, Chipotle opened 43 new restaurants, including 38 Chipotlanes. The addition of Chipotlanes enhanced customer access and convenience and bolstered new store restaurant sales, margins and returns. It continues to expand its digital drive with Chipotlanes. Backed by impressive unit economics and the success of small-town locations, the company anticipates opening between 255 and 285 restaurants in 2023, with more than 80% of the restaurants having Chipotlane.
Chipotle has been working on a new pipeline for its menu offerings. During the third quarter of 2022, the company benefited from the solid performance of Garlic Guajillo Steak (a limited-time offering), thereby driving higher frequency and spending. It also initiated the testing of Chicken Al Pastor in Denver and Indianapolis. With a focus on go-to orders, the company intends to roll out the product in 2023, subject to its acceptance in the stage-gate process. The introduction of new items and solid marketing activities that combine brand-building efforts, transaction-driving promotions and advertising are likely to lead to a steady inflow of new customers.
Concerns
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Shares of Chipotle have declined 9% in the past year compared with the industry’s 5% fall. The downside was mainly caused by commodity and wage inflation, supply chain challenges and a challenging macro environment. Although most dining services are open, traffic is still low compared with pre-pandemic levels. The company intends to monitor the situation regularly to gauge the impacts of COVID-19.
Chipotle has been continuously incurring increased expenses, which have been detrimental to margins. During third-quarter 2022, food, beverage and packaging costs came in at $662.5 million compared with $591.3 million in the prior year quarter. In the third quarter of 2022, the benefit of menu price increases was partially offset by inflation across the menu, primarily due to higher costs for dairy, packaging, tortillas and avocados. Labor costs came in at $557.2 million compared with $502.8 million in the prior-year quarter. For fourth-quarter 2022, the company anticipates labor costs in the mid-24% range on account of leverage from the menu price increases.
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 Zacks Retail-Wholesale sector are Tecnoglass Inc. TGLS, Wingstop Inc. WING and Chuy's Holdings, Inc. CHUY.
Tecnoglass currently sports a Zacks Rank #1. Shares of the company have gained 18.8% year to date.
The Zacks Consensus Estimate for TGLS’ 2023 sales and EPS suggests growth of 11.2% and 9%, respectively, from the year-ago period’s levels.
Wingstop carries a Zacks Rank #2 (Buy). WING has a long-term earnings growth rate of 12%. Shares of WING have decreased 9.5% year to date.
The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.3% and 16.1%, respectively, from the comparable year-ago period’s levels.
Chuy’s Holdings currently carries a Zacks Rank #2. CHUY has a trailing four-quarter earnings surprise of 18.6%, on average. Shares of CHUY have increased 5.5% in the past year.
The Zacks Consensus Estimate for Chuy’s Holdings 2023 sales and EPS suggests growth of 8.6% and 10.4%, respectively, from the corresponding year-ago period’s levels.
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Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report
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