Chipotle Mexican Grill Inc.’s turnaround is being driven by digital sales and new menu items, analysts said, with shares climbing 5% Wednesday after the chain reported a second-quarter earnings beat and raised guidance.
Chipotle’s CMG, +5.12% stock has soared this year, up 80% in 2019 compared with 20.4% growth for the S&P 500 index SPX, +0.41% . Chipotle shares are up almost as much for the past 12 months, 73%.
For the second quarter, digital sales grew 99.1%, accounting for 18.2% of sales. Same-store sales soared 10%.
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“Chipotle’s digital ecosystem — which includes mobile order and pay, loyalty [promotions] and digital delivery — has rapidly become the engine behind its impressive comeback story,” wrote KeyBanc Capital Markets’ Eric Gonzalez. “Chipotle is rapidly distinguishing itself as one of the few winners in what we perceive to be an economically-challenged/[venture capital]-subsidized, third-party delivery ecosystem.”
KeyBanc calls out delivery, “the fastest growing part of its business,” and campaigns bringing in customers who stay on after the promotional period ends.
KeyBanc rates Chipotle stock overweight and raised its price target to $860 from $780.
But it’s not just the services that are boosting Chipotle, it’s also the food.
“Carne asada is close to a national rollout as customer feedback [in select markets] has been positive and the item will not affect throughput or operational complexity,” wrote JPMorgan analysts. “Beverages will be a key focus for 2020 and a new restaurant design for the next remodel cycle will allow the customer to grab their drink before they arrive at the register.”
JPMorgan rates Chipotle stock neutral with a $705 price target, up from $650, with analysts calling the fast-casual chain a “rare growth story.”
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On the call, Chipotle Chief Executive Brian Niccol talked about other new menu items, specifically quesadillas, which he said have been well-received by customers, but are slowing work flow.
“[W]e are not going to roll out new menu items at the sacrifice of throughput,” he said, according to a FactSet transcript.
Another food item giving Chipotle trouble is the higher costs of avocados. Food, beverage and packaging costs came in at 33.7% of revenue for the quarter; revenue totaled $1.4 billion. That’s up 110 basis points year-over-year. The higher avocado spend was partially offset by menu price increases, the company said. Higher dairy costs also played a small role in the quarter’s results.
“If avocado prices fall to first-quarter 2019 levels and stay there in 2020, our rough estimate is that 2020 earnings per share could be boosted by [about] 80 cents,” said SunTrust Robinson Humphrey analysts. “Chipotle is not seeing a material increase in its other commodity costs, but increased inflation in 2020 could be offset by supply-chain efficiencies.”
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SunTrust rates Chipotle stock buy with an $815 price target, up from $780.
Avocado complications aside, BTIG analysts led by Peter Saleh think there’s more growth ahead for Chipotle.
“We believe Chipotle remains in the middle stages of its sales and unit economic turnaround with considerable momentum on initiatives like menu innovation, expanding digital sales and stronger marketing,” BTIG wrote. “The strength of these initiatives has driven improvement in comparable sales and restaurant margin that we expect to continue as these metrics progress towards their historical levels.”
BTIG rates Chipotle stock buy and raised its price target to $845 from $790.
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