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Why We’re Optimistic on Chipotle’s Future

Third-quarter earnings reveal promising early returns from CEO Brian Niccol’s appointment with several intriguing initiatives left in the pipeline

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Chipotle Mexican Grill Inc
(CMG)

We believe investors should walk away from

While there's no denying the potential appeal of new menu items, restaurant formats (including drive-up windows), and a new loyalty program, it's the ability to execute basic functions like advertising and throughput that was the most impressive takeaway and helps to reinforce the brand behind our narrow moat rating.

While comps of 4.4% were slightly behind Wall Street expectations of 4.9%, it tells us two things. One, the new "For Real" advertising campaign is connecting with consumers while helping to nullify the well-publicized food-safety incident in Ohio. Comparable transactions were flat, but barring a more pronounced economic downturn, we believe transaction growth should turn positive in the fourth quarter with comps remaining in the mid- to high single digits over the near future. Two, digital orders (up 48% to 11.2% of total sales) and delivery are benefiting store-level utilization and should eventually drive greater operating leverage. As it optimizes mobile order and delivery, we believe Chipotle will be positioned to introduce new products like quesadillas, nachos, avocado tostadas, and chocolate milkshakes that should stimulate consumer curiosity without adding undue operational complexity.

While management did not provide full 2019 guidance, we were encouraged that it is planning for a modest increase in store openings (140-155 versus 130-150 in 2018, less the previously announced 55-65 closures). We would not be surprised to see market optimism prop up Chipotle's stock as comps accelerate, though we're only planning a modest increase to our $400 fair value estimate, which already assumes restaurant margins and operating margins will recover to the low to mid-20s and the low to midteens, respectively, over the next five years.

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About the Author

RJ Hottovy

Sector Strategist
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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.

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