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Chipotle Menu & Digital Novelty Dependable, High Costs a Woe

Zacks

Chipotle Mexican Grill, Inc. CMG has been extensively focusing on its several food safety measures after it ran into trouble throughout 2016 due to an issue revolving around food-borne illnesses. Ever since, this fast-casual Mexican chain has been making aggressive efforts to restore its economic model as well as regain customer trust.

However, high costs of operations and intense competition in the restaurant space persist to be potential concerns.

Last month, the company reported mixed results for the third quarter of 2018, wherein earnings surpassed analysts’ expectations while revenues lagged the same. Adjusted earnings of $2.16 per share topped the Zacks Consensus Estimate of $2 by 8%. The bottom line also surged 62.4% from the year-ago quarter, backed by increased revenues and lower food costs.

Meanwhile, shares of Chipotle have soared 71.1% in the past year, outperforming the industry’s collective growth of 14.1%.



Sales Building Initiatives Bode Well

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 and enhancement of guest experience by retraining workers, offering technology-driven convenience and adopting a more aggressive brand marketing policy. In the third quarter of 2018, comps rose 4.4%, driven by an increase in pricing and average tax plus customers adding queso.

Additionally, Chipotle has been working on a new pipeline for its menu offerings. The company is currently testing quesadillas, nachos, bacon, lemonade and a Mexican chocolate milkshake for future dole-outs.

Notably, the company’s robust marketing activities, including a combination of brand-building efforts as well as transaction-driving promotions and advertising, are leading to a steady inflow of customer footfall.

Chipotle is prioritizing its e-commerce program to gain customer confidence as part of its digital innovation. The company is trying extremely hard to make digital ordering more appealing to its customers and more efficient for its restaurants in order to drive digital sales and retain a loyal clientele.

In the third quarter, the company created new records as digital sales accounted for 11.2% of total sales, growing 48% year over year. Also, since the rollout of its “Smarter Pickup Times” technology, there has been a significant increase in digital orders and higher guest satisfaction. As the company’s digital orders are made on a second make-line, the same allows it to deliver an excellent throughput and enhance customer experience. Notably, its patrons are increasingly resorting to digital ordering.

In 2018, the company plans to accelerate the rollout of its second make-lines, which will enable a faster and more accurate accessibility for digital customers as well as allow restaurant crews to bolster higher sales volumes. So far, the company progressed with digitizing second make-lines in roughly 7500 restaurants. It is aiming to make it available across all restaurants by this year-end. The digital pick-up shelves are currently present in 350 restaurants and the company expects all its eateries to comprise the same by mid-2019.

Concerns

Chipotle’s continued efforts to connect with its customers in order to retrieve their faith and loyalty as well as revive their visibility at its stores on the back of assertive marketing and promo expenses, has been hurting its profitability. Moreover, costs to support the company’s newly designed food safety program can weigh on its margins. Also, implementation of food safety practices has increased the strength of labor required to prepare and serve food, thereby inducing higher labor costs, which mighty continue to keep profits under pressure.

During the third quarter, general and administrative expenses amounted to 8.9% of total revenues, reflecting an increase of 10 bps year over year. This downside is due to rise in expenses related to corporate restructuring including stock compensation modification expenses, severance, relocation and outside services.

Zacks Rank & Stocks to Consider

Chipotle carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the restaurant space are BJ’s Restaurants BJRI, Darden DRI and Dunkin’ Brands DNKN, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BJ’s Restaurants, Darden and Dunkin’ Brands’ earnings for the current year are expected to grow 64.5%, 16.8% and 16.5%, respectively.

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