Chipotle is a top Goldman pick as competition shifts toward consumer value

By Steve Gelsi

Goldman takes 'selectively constructive' view on restaurants as customer push back on higher prices

Chipotle Mexican Grill Inc. won "top idea" status by Goldman Sachs Thursday as analysts launched coverage of 11 restaurant stocks in a consumer environment that's become more price-sensitive.

As consumers aim to stretch their dollars, Goldman sees Chipotle (CMG) generating the foot traffic and unit growth that will determine success in the space.

With a buy rating and a price target of $ 3,730 a share, Chipotle Mexican drew praise for its "ability to scale the business in a highly profitable manner without losing grip on the core operations including the quality of food/customer experience," Goldman Sachs analysts said.

Chipotle Mexican Grill's stock was up by 2.4% on Thursday. The stock has risen 42 % in 2024, outpacing the 13.8 % gain by the Nasdaq.

Overall, the "strong pricing tailwinds" in the sector have been winding down while competition over value steps up as consumers adjust to a "more normalized" inflation environment, analysts said.

"We believe consumers' perception/assessment of value is expanding into quality (i.e., taste, ingredients), guest experience (i.e., order accuracy, shorter wait-times, and convenience), and brand trust/relevance in addition to the more traditional metrics such as price and portion sizes," Goldman analyst Christine Cho said.

"We think this paves the way for resilient growth/continued market share gains for select brands (including many fast casual brands) that stand out on relative quality vs. value," Cho said.

Along with a buy on Chipotle, Goldman initiated buy ratings on Starbucks Corp. (SBUX); Shake Shack Inc. (SHAK); Burger King, Tim Horton's and Popeye's parent company Restaurant Brands International Inc. (QSR); Sweetgreen Inc. (SG); and Domino's Pizza Inc. (DPZ).

Goldman assigned neutral ratings to McDonald's Corp. (MCD); KFC, Taco Bell and Pizza Hut parent Yum Brands Inc. (YUM); and Wingstop Inc. (WING).

Jack in the Box Inc. (JACK) and Wendy's Co. (WEN) were initiated with sell ratings.

While consumers intend to eat at home more often, the reality is restaurants continue to capture a greater share of personal consumption expenditures.

"Consumers are undoubtedly more discriminating in their dollar spend dealing with higher living expenses and higher menu prices at restaurants.," Goldman analyst Cho said.

However, Goldman Sachs economists remain "cautiously optimistic" about the health of the U.S. consumer, with a projection of "still-robust" discretionary cash inflow growth of 3.4% this year, analysts said.

Overall, Goldman analysts said they're "selectively constructive" on American restaurants.

Also read: These restaurant companies are expected to show the fastest growth through 2026

-Steve Gelsi

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06-13-24 1428ET

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