Morningstar

Chipotle’s Turnaround Faces Execution, Cost Questions

Investors should wait for a larger margin of safety before buying shares of Chipotle given the risks involved in the firm’s bid to win back customers.

Securities In This Article
Chipotle Mexican Grill Inc
(CMG)

Narrow-moat

It's clear that Chipotle is struggling to reconnect with consumers, evidenced by the 21.9% comp decline during the quarter (including a 15.2% decrease in comparable traffic) and roughly 20% declines thus far in October. Management confirmed our suspicion that the implementation of the food safety program and crew turnover had affected throughput speed and diluted the customer experience, something that aligns with our recent conversations across the fast-casual space.

To remedy these issues, management plans to prioritize menu innovation (including the nationwide rollout of chorizo as a protein option in October and plans to introduce a dessert option) and make digital ordering (currently 6% of sales) more efficient for its customers and restaurants. While new menu additions might seem to run counter to the idea of throughput efficiency, we don't believe any of the new menu items announced (or in test markets) will disrupt the workflow process. However, we do have questions about how quickly digital ordering can be implemented and adopted. While digital ordering clearly plays into consumers wanting greater ordering flexibility, Panera's 2.0 initiatives--which are yielding encouraging results--required healthy investments in technology, training, and implementation. While Chipotle came across as confident about its ability to roll out these changes, we expect unseen implementation and consumer adoption costs and plan to adopt a more conservative outlook than its initial 2017 outlook calling for high-single-digit comps, restaurant margins of 20%, and EPS around $10 per share. Taken together, we're not planning material changes to our $425 fair value estimate and would wait for a wider margin of safety.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

More in Stocks

Our Top Pick for Investing in US Renewable Energy

Utility-scale solar and battery storage installations are poised to set records in 2024.
Brett Castelli

How to Measure a Stock’s Uncertainty

Morningstar’s Uncertainty Rating helps investors understand the risks associated with an investment and how that may influence a decision to buy.
Emelia Fredlick

How to Determine Whether a Stock Is Cheap, Expensive, or Fairly Valued

The Morningstar Rating for stocks gauges how a stock’s price compares with what our analysts think it’s worth.
Emelia Fredlick

About the Author

R.J. Hottovy

Sector Strategist
More from Author

R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

Sponsor Center