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Chipotle (CMG) Rides on Digital Initiatives, Cost Woes Linger

Chipotle Mexican Grill, Inc. CMG is likely to benefit from digitalization, menu innovation and expansion efforts. So far this year, shares of the company have rallied 52.6% compared with the Zacks Retail – Restaurants industry’s 2.7% growth. However, rise in food, beverage and packaging costs along with coronavirus-related woes is concerning.

Let’s delve deeper.

Key Catalysts

Chipotle is focusing on expanding its digital program to drive growth during the coronavirus pandemic. In order to drive digital sales and retain customers amid the crisis, the company is leaving no stone unturned to make digital ordering more appealing to customers and more efficient for its restaurants.

In this regard, the company has redesigned and simplified its online ordering site, enabled online payment for catering, introduced 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 second-quarter 2020, digital sales soared 216.3% year over year to $829.3 million. Notably, digital sales represented 60.7% of sales during the quarter. Although the company’s in-restaurant dining rooms are opening, its digital sales momentum remained strong in July with a mix of nearly 50%. Moreover, collaboration with all major third-party delivery aggregators such as Uber Eats and Grubhub is attracting new customers.

Meanwhile, Chipotle 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 retaining workers, technology-driven convenience, and more aggressive brand marketing. The rollout of queso has substantially spurred sales. Additionally, Chipotle has been working on a new pipeline for its menu offerings.

For 2020, the company’s priorities are likely to revolve around five key initiatives, namely, usage of stage gate process, leveraging digital programs to expand access and convenience, frequent customer interaction through loyalty program, menu innovation and operational excellence. Moreover, the company is focusing on unit expansion to drive growth. It expects to inaugurate 150-165 restaurants in 2020.

Concerns

Chipotle’s earnings results in the coming quarters are likely to reflect the impact of the coronavirus outbreak. Recently, the company closed 300 restaurants owing to a spike in coronavirus cases. Although the company’s 85% of dinning services are open, traffic is still very low. We believe the pandemic mess will further dent traffic and sales in the coming quarters.

Moreover, Chipotle has been continuously shouldering increased expenses, which have been detrimental to margins. In second-quarter 2020, food, beverage and packaging costs, as a percentage of revenues, decreased 40 basis points (bps) to 33.3%. It was primarily owing to lower avocado costs, increase in menu price in late 2019, and to some extent, reduced waste, freight, and paper costs.

Also, implementation of food safety practices has increased the amount of labor required to prepare and serve food, resulting in higher labor costs that may continue to keep profits under pressure.

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 Papa John's International, Inc. PZZA, Jack in the Box Inc. JACK and El Pollo Loco Holdings, Inc. LOCO. Papa John's sports a Zacks Rank #1, while Jack in the Box and El Pollo Loco carry a Zacks Rank #2 (Buy).

Papa John's has a three-five year earnings per share growth rate of 8%.

Jack in the Box’s 2021 earnings are expected to increase 17.7%.

El Pollo Loco has a trailing four-quarter earnings surprise of 94.1%, on average.

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