Plenty of Optimism in Chipotle's First Quarter

R.J. Hottovy: Details were sparse, but we believe investors should walk away from Brian Niccol's first quarter as Chipotle's CEO with a sense of optimism. While the company will provide additional turnaround strategies on a special conference call this quarter, we believe Niccol has demonstrated the appropriate balance between Chipotle's legacy "Food with Integrity" mantra as well as a willingness to revisit aspects of its approach to menu innovation, marketing, and in-store operations.

In turn, this gives us confidence that longer-term outlook calling for low- to mid-single-digit comps, high-single-digit top-line growth, restaurant margins in the mid-20s, and operating margins in the mid-teens are still achievable. We believe it will take time to identify, refine, and implement Niccol's "path to performance" plan--which will also likely require incrementally higher restaurant, technology, and infrastructure investments than previously communicated; however we're already seeing some positive signs. These include making the brand more visible in marketing campaigns, accelerating the rollout of the digitally enhanced second make line for delivery/catering orders, daypart expansion including the potential rollout of breakfast, as well as in-store practices to reduce food waste. We're also encouraged that management plans to review "less than 100" underperforming stores this quarter, as well as evaluating drive-thru formats to promote greater product accessibility.

We're planning a modest increase to our $350 fair value estimate due to more optimistic near-term margins stemming from marketing spend during the first quarter, though we will wait for greater visibility regarding turnaround efforts before revisiting our longer-term assumptions. Chipotle shares strike us as fairly valued at current levels, but we also see color behind turnaround plans acting as a potential positive catalyst over the near future.