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Chipotle (CMG) Banks on Chipotlane Add-ons Amid Dismal Traffic

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Chipotle Mexican Grill, Inc. (CMG - Free Report) is poised to benefit from the addition of Chipotlanes, digital initiatives, collaboration with third-party delivery providers, and menu innovation. Also, increased focus on marketing initiatives bode well. However, dismal traffic due to the coronavirus pandemic and rise in delivery fees remain headwinds.

Let’s delve deeper.

Key Catalysts

Chipotle continues to focus on the addition of Chipotlanes for the enhancement of customer access and convenience as well as improvement in new store restaurant sales, margins and returns. During the fourth quarter of 2020, the company opened 61 new restaurants, out of which 42 had Chipotlane in it. Notably, digital gap for restaurants (with Chipotlanes) were 10% higher compared with non-Chipotlane restaurants. The increase was primarily driven by higher-margin digital pickup orders. For 2021, the company expects 70% of its openings to have a Chipotlane in it.

Meanwhile, Chipotle is leaving no stone unturned to make digital ordering more appealing to customers and increasingly efficient for restaurants. Notably, the company has redesigned and simplified the online ordering site, enabled online payment for catering 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. In order to boost convenience in the digital ordering platform, the company also initiated features such as unlimited customization, contactless delivery and group ordering. Another initiative that has been benefiting the company is the rewards program.

During fourth-quarter 2020, digital sales soared 177.2% year over year to $781.4 million. It contributed 49% to sales during the quarter. Notably, digital sales mostly comprised order-ahead and digital pickup orders owing to tougher COVID-related restrictions.

The company is also 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, technology-driven convenience, along with more aggressive brand marketing. Also, it has been working on a new pipeline for its menu offerings. Currently, the company is testing cauliflower rice, smoked brisket, salads in quesadillas and gaining valuable feedback in various markets. Also, it is witnessing strong demand for carne asada.  

Notably, the new items, solid marketing activities that include a combination of brand-building efforts, as well as transaction-driving promotions and advertising are likely to lead to steady inflow of new customers going forward.

In the past six months, shares of the company have gained 14.8% compared with the industry’s 10.4% growth.

Concerns

Chipotle’s results in the coming quarters are likely to be impacted by the pandemic. Although majority of the dining services are open, traffic is still very low. We believe the pandemic will dent traffic and sales in the coming quarters.

Moreover, Chipotle has been continuously shouldering increased expenses, which have been detrimental to margins. Notably, the company has been witnessing a rise in expenses related to delivery fees. During the fourth quarter, other operating expenses moved up 17.9% year over year.

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 Zacks Retail-Wholesale sector include L Brands, Inc. (LB - Free Report) , Abercrombie & Fitch Co. (ANF - Free Report) and Jack in the Box Inc. (JACK - Free Report) . L Brands and Abercrombie sport a Zacks Rank #1, while Jack in the Box carries a Zacks Rank #2 (Buy).

L Brands and Abercrombie earnings for 2022 are expected to rise 15% and 286.3%, respectively.

Jack in the Box has a three-five year earnings per share growth rate of 17%.

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