Chipotle Mexican Grill, Inc. (CMG Quick QuoteCMG - Free Report) is poised to benefit from the digital initiatives, the addition of Chipotlanes and menu innovation. Also, the emphasis on restaurant development and culinary improvements bode well. However, inflationary pressures are a concern.

Let us discuss the factors that highlight why investors should retain the stock for the time being.

Key Catalysts

Chipotle is leaving no stone unturned to make digital ordering more appealing to customers and increasingly efficient for restaurants. 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. There has also been a significant increase in digital orders and guest satisfaction since the rollout of its “Smarter Pickup Times” technology. The company witnessed a rise in order-ahead transactions, courtesy of enhanced guest access and convenience. Digital sales contributed 39% to sales during first-quarter 2023. CMG is focused on robotics-based autonomous vehicles for delivery, which is likely to enhance the customer experience in the upcoming periods.

Chipotle is also gaining from the rollout of Chipotlanes. During the first quarter of 2023, it opened 41 new restaurants, with 34 locations — including a Chipotlane. The addition of Chipotlanes enhanced customer access and convenience and bolstered new store restaurant sales, margins and returns. It continues to expand its digital drive with Chipotlanes. Backed by impressive unit economics and the success of small-town locations, the company anticipates opening between 255 and 285 restaurants in 2023, with more than 80% of the restaurants having Chipotlane.

Increased focus on restaurant development and culinary improvements bodes well. Recently, the business unveiled a new Responsible Restaurant Design that includes elements like rooftop solar panels, all electrical systems and equipment, LED lighting, Cactus leather chairs and electrical vehicle charging points at specific areas. The company stated that the pilot will go through standard stage gate procedure and that the successful components will be implemented into future restaurant formats. In terms of culinary, the company initiated the testing of a new grill to improve the overall cooking process for chicken and steak. Following the roll out in select restaurants, the company reported solid feedback with respect to the same. Part of the ongoing stage gate process, the company anticipates rolling out the grill in 10 additional restaurants in the upcoming periods. The company expects the strategic investments and initiatives to drive growth.

The company focuses on menu innovation to drive growth. During the first quarter of 2023, the company announced the addition of Fajitas to its Quesadilla platform (as a permanent menu item) and reported a solid business with respect to the same. The addition was supported by the limited complexity in its restaurant operations. The company announced the global roll out of Chicken Al Pastor in the United States, Canada and Europe and reported solid customer feedback. The introduction of new items, solid marketing activities that include a combination of brand-building efforts and transaction-driving promotions and advertising are likely to lead to steady inflow of new customers.

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In the past six months, shares of the company have surged 55.7% compared with the industry’s 9.9% growth.

Concerns

Chipotle has been continuously shouldering increased expenses, which have been detrimental to its margins. Commodity and wage inflation are adding to the downside. During first-quarter 2023, food, beverage and packaging costs came in at $692.6 million compared with $626.9 million reported in the prior-year quarter. The upside was primarily driven by inflation across food costs, including dairy, tortillas, salsa, beans and rice. The labor costs increased 9.8% to $583.8 million from the year-ago levels.

The company anticipates inflationary pressures to persist for some time. In the second quarter, it expects elevated costs concerning avocados. CMG anticipates cost of sales to remain in the low 29% range while labor costs are expected to remain in the mid-24% range.

The company’s development timeframe has been prolonged courtesy of difficulties, such as utility installation, component and raw material shortages and delays with permits and inspections. The company anticipates the challenges to persist throughout 2023.

Zacks Rank & Key Picks

Chipotle currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Retail-Wholesale sector include:

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