Shares of Chipotle Mexican Grill, Inc.CMG hit a 52-week high of $471.57 in Monday's trading session. The upsurge was on the back of a Bloomberg report that this quick-casual Mexican food chain has raised prices in about 440 of its stores of late.
Notably, Chipotle returned over 24% year to date, surpassing the Zacks categorized Retail-Restaurants industry's gain of 2.5%. In fact, the company has been trading close to its highest level over the past year, but what made it move?
The Rebound Story
Chipotle's results in the past few quarters continued to be affected by the negative publicity related to the food-borne illnesses that surfaced toward 2015-end, despite various food-safety initiatives.
In fact, as a safety measure the fast casual chain was forced to close several outlets. Although these were reopened later with fresh ingredients and extensive cleaning and sanitizing activities, the incidents dealt a severe blow to Chipotle's sales. Since then, the company's earnings and revenues came under tremendous pressure. Also, comps witnessed a decline of 20.4% in full-year 2016.
Nevertheless, Chipotle is leaving no stone unturned to reinvigorate investors' confidence and regain its footing. In this regard, its board of directors recently discarded the co-CEO model and made Steve Ells the company's sole Chief Executive Officer (CEO) in order to deal with the ongoing challenges in a better way. Ells particularly aims to focus on simplifying restaurant operations so as to offer better service and healthier food to attract customers.
In addition, Chipotle aspires to strengthen its brand and recover sales by shifting its strategy from giveaways, discounts and rewards to new menu items, simplification of restaurant operations, enhancement of guest experience, better operations including faster throughput and more aggressive brand marketing.
Also, the company is moving insistently to make digital ordering more appealing to its customers and more efficient for its restaurants, in order to drive digital sales. In the regard, Chipotle has redesigned and simplified its online ordering site, enabled online payment for catering and integrated with several well-known third-party providers for delivery.
Improvement in food handling, testing and food preparation procedures also remains the company's top priority. To achieve this, Chipotle has significantly expanded training, food safety inspections and third-party as well as internal audits at its restaurants. Moreover, the company announced that it was the only national restaurant to remove added colors, flavors or preservatives of any kind from its ingredients, at all U.S. restaurants of late.
Reportedly, this fast casual chain has closed all 15 of its ShopHouse Southeast Asian Kitchen restaurants, recently. We note that this latest move of shutting down all ShopHouse restaurants is a positive, as the brand failed to be a viable growth strategy for the company.
One of the several initiatives of Chipotle to get its groove back is its latest move of price hike. For the first time in three years, it raised prices by an average of about 5%, affecting about 20% of the company's total stores. The increase was apparently implemented in a bid to help offset labor and food inflation.
Consequently, this move led to increased investor confidence as it guided Chipotle to its 52-week high. However, it remains to be seen if the confidence sustains through Chipotle's first quarter 2017 earnings results, slated to release on Apr 25.
As of now, the Zacks Consensus Estimate for the quarter's earnings is $1.30 per share, reflecting an increase of 248.2% year over year. Additionally, revenues are expected to be $1.05 billion, which is 26.1% higher than the year-ago quarter. However, it is to be noted that the first quarter of 2017 should provide easy year-over-year comparisons as Chipotle was in the midst of its massive food-safety scandal this time last year.
It is important to note that the operating environment for restaurants in general is not very conducive right now. The first quarter of 2017 saw the fifth consecutive quarter of comps decline. Traffic also continued to be hurt in the quarter, thereby reflecting the ongoing somber mood in the restaurants space. Thus, the given earnings and sales expectations from Chipotle might just prove to be very optimistic right now and investors should tread carefully.
Additionally, the company is experiencing elevated costs in relation to its food safety measures as well as promotional and marketing spend. This could weigh on margins heavily. Also, the company is facing increased competition from other Mexican chains like Yum! Brands, Inc. YUM owned Taco Bell, Jack in the Box Inc.'s JACK subsidiary Qdoba and Brinker International Inc.'s EAT Chili's Grill & Bar. This is lowering the brand's ability to recover and return to its peak levels of 2014, as smoothly and quickly as expected.
Although the new brand-management efforts and sales-building initiatives would help Chipotle counter challenges, we believe it will take some time for the company to completely restore its economic model as well as customers' trust and thereby return to its former glory.
Currently, Chipotle carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
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