Chipotle's Results Show Efficacy of New CEO

Chipotle's CMG fourth-quarter update offered the clearest evidence to date that it has corrected organizational issues that led to underwhelming customer experience the past several years while taking steps to reclaim its mantle as one of the industry's leading innovators (and reinforcing the brand intangible asset behind its narrow moat). Comps of 6.1% (2.0% traffic, 3.3% price, 0.8% mix) were the clear highlight of the quarter, not only because it puts Chipotle among industry leaders, but also because it reveals more about the efficacy of CEO Brian Niccol's recent priorities. With October-November comps running at about 4%, December-implied comps came in around 10%. We attribute this acceleration to several factors, including streamlined operations, the effective "For Real" advertising campaign, a free-delivery bowl promotion in late December, and improved mobile app functionality/awareness.

More important, we believe there is evidence that these trends will continue into 2019. Backed by its second make lines, Chipotle is seeing greater success with digital orders (up 66% to 12.9% of total sales) and delivery than many of its peers. We also see the "Chipotlane" mobile order/pickup lane format as a natural extension of its digital efforts, and believe these locations could be a material revenue driver. As it optimizes mobile order/delivery and rolls out a national loyalty program in 2019, we believe Chipotle will also be positioned to introduce new products that stimulate consumer curiosity without adding undue operational complexity.

Based on Chipotle's top-line momentum and realistic guidance calling for mid-single-digit comps, we're planning roughly a 10% increase to our $425 fair value estimate. While we believe Chipotle's current initiatives will likely result in medium-term outperformance--and likely keep the stock trading at lofty multiples for the foreseeable future--we believe they are fully priced in and would wait for a more attractive entry point.

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