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Why Chipotle Has Capital Growth Potential

Chipotle Mexican Grill Inc. (NYSE:CMG) could deliver additional stock price growth after its 1% rise over the past year.

The fast-casual restaurant chain is investing in its website, introducing new menu items and improving its loyalty program to boost its profitability.

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Online investment

The company rolled out its delivery service to the majority of its stores in fiscal 2019. This could broaden its potential customer base and improve its competitive position at a time when consumers are increasingly opting to use food delivery services.

In addition, it has invested in new technology to make the process of ordering through its website much easier. For example, it has installed pickup points at its restaurants so that customers can quickly collect their online order without needing to wait in line. This contributed to the business reporting a 78% increase in online sales in the fourth quarter of 2019 compared to the prior-year quarter.

Due to the populartity of its drive-thru lanes, Chipotle also plans to double the number of drive-thrus at its restaurants in 2020.

Innovation

Chipotle plans to communicate with its loyalty program members more frequently to catalyze its sales growth. For example, it will provide special offers and recommendations to its loyalty members by using a greater amount of data on their purchasing history. This could encourage its loyalty program members to visit its stores more frequently, and may help to increase its repeat business levels.

The restaurant has added a range of new items to its menu to appeal to a broader range of tastes and encourage existing customers to visit more often. So far, its premium steak and updated salads have proven to be popular with customers. It expects to introduce one to two similar new menu items per year. It has a strong pipeline of new products set for release in 2020, according to its fourth-quarter results, which could boost its sales performance in the near future.

Potential challenges

The company reported a 5% increase in labor costs in fiscal 2019. It expects a similar rate of growth in 2020, which could negatively impact its financial performance.

In addition, the business may experience lower customer numbers in upcoming quarters due to the impact of the coronavirus. Consumers may seek to avoid public places where they can contract the virus. This may cause them to dine out less than they otherwise would, which could hurt Chipotle's sales prospects.

In response, Chipotle is seeking to improve its efficiency through investing in training for its staff. This could increase their productivity and help to offset the impact of rising labor costs on the company's bottom line. Additionally, the burrito chain is offering a larger range of benefits to its employees. For example, it offers debt-free degrees, bonuses and mental health benefits to its staff, which could reduce its level of employee turnover and boost morale. This may result in an improved dining experience for its customers and a stronger competitive position for Chipotle.

Outlook

Market analysts forecast the company will record a 49% increase in earnings per share in fiscal 2020, followed by growth of 26% in 2021. Its forward price-earnings ratio of 34 suggests it offers good value for money given its growth strategy.

Disclosure: The author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.