Chipotle Banks On Strategic Initiatives To Regain Lost Mojo

On Sep 5, we issued an updated research report on quick-casual and fresh Mexican food restaurant chains operator, Chipotle Mexican Grill, Inc. (NYSE:CMG) .

Throughout 2016 Chipotle’s results continued to be affected by the negative publicity related to the food-borne illnesses, which had surfaced toward 2015-end. Chipotle is thus leaving no stone unturned to reinvigorate investors’ confidence and regain its footing.

Turnaround Efforts

To regain lost ground, Chipotle’s board of directors have discarded the co-CEO model and made Steve Ells the company’s sole Chief Executive Officer (CEO) in order to deal with the ongoing challenges in a better way. Ells particularly aims to focus on simplifying restaurant operations so as to offer improved service and healthier food to enhance guest experience and attract customers. Further, the company added four new members to rejuvenate its board.

In addition, Chipotle aspires to strengthen its brand and recover sales by shifting strategies from giveaways, discounts and rewards to new menu items, simplification of restaurant operations, upgrade of guest experience, better operations including faster throughput and more aggressive brand marketing.

The company strongly believes that there exists an opportunity to excite current customers and attract new ones through thoughtful menu development. In fact, given the early operational success it found with the queso offering, the company has expanded the test to more than 350 restaurants, in order to evaluate customer acceptance. If the results are positive, the company may even start with a national rollout as early as mid-September.

The company is also likely to implement a menu price rise in the fourth quarter that should boost comps. Also, an increased focus on catering and delivery services might continue to augment the top line, going forward.

Also, Chipotle is consistently attempting to make digital ordering more appealing to customers and more efficient for its restaurants with an objective to drive digital sales. Additionally, the company is on track to launch a new mobile app this year, comprising substantial improvements, to provide customers with a better quality digital experience. Though the developments are still in early days, the company is convinced to emerge a leader in digital ordering, given the momentum and positive customer reactions witnessed so far.

Earlier in March, Chipotle had fulfilled its pledge of refraining from using colors, flavors or preservatives of any kind in any of its ingredients. Improvement in food handling, testing and food preparation procedures remains the company’s top priority. The company’s enhanced focus on making fresh, wholesome food accessible to everyone should also aid in bringing back health-conscious clients.

Headwinds

Chipotle started 2017 on a positive note, marking a turnaround as its sales finally began to bounce back from the massive food safety scandal that resulted in massive sales drop and denting of reputation.

However, the recent closure of a Washington-area outlet due to an apparent norovirus alert has started a fresh round of food-safety scare. Presence of rodents was detected at a Dallas outlet, further adding to the woes. These might possibly hamper same-store sales, going forward.

Also, Steve Ells’ qualms about the company’s ability to reach its previously announced guidance of high single digits rise in same-store sales and adjusted earnings per share of $10.00 in 2017, raises concerns.

Additionally, high labor costs, rising avocado prices along with elevated marketing and promo expenses are expected to pose a threat to the restaurant chain’s profitability, while a soft consumer spending environment in the U.S. restaurant space might limit revenue growth.

Additionally, the company currently faces stiff competition from the likes of Yum! Brands, Inc. (NYSE:YUM) owned Taco Bell and Jack in the Box Inc.’s (NASDAQ:JACK) subsidiary, Qdoba. This in turn lowers the brand’s ability to easily recover and return to its peak levels of 2014.

Bottom Line

Despite a strong start to the year, a fresh round of food-safety fright has once again gripped the company in dilemma. As a result, alarming questions have been raised over the company’s turnaround.

Chipotle’s shares have evidently sunk 32.3% in the last three months compared with the industry’s fall of 6.3%.

Nevertheless, the company’s continued focus on food safety, simplification of restaurant operations, menu innovation, improved digital offerings and increased brand marketing bode well for growth.

Thus, though Chipotle is on the road to recovery, we believe, it will take some time for the company to completely restore its economic model as well as customers’ trust and return to its former glory.

Chipotle currently has a Zacks Rank #3 (Hold). A better-ranked stock in this industry is Papa John’s International, Inc. (NASDAQ:PZZA) , holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the trailing four quarters, Papa John’s delivered an average positive earnings surprise of 5.10%.

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