Chipotle preview: Pickup shelves and catering expected to drive sales

Chipotle Mexican Grill Inc. is scheduled to announce second-quarter earnings on Wednesday after the closing bell, and while analysts want details about the company’s turnaround, they’re already bullish about some of what they’ve heard.

“In our opinion, several of Chipotle’s same-restaurant sales initiatives hold promise – two of our favorites are expanded catering options and rapid pick-up for digital orders,” wrote Stifel analysts in a note published July 11.

The latest earnings announcement comes just a few weeks after a hotly-anticipated business update call that largely fell flat.

However, there were a couple of things that analysts latched onto: pickup shelves that Chief Executive Brian Niccol said “caused a double-digit increase in our digital sales within the first few weeks” when it was introduced in Denver; and catering.

“For example, recent changes to the catering program allows smaller groups (as few as six people) to place orders with tiered pricing options, whereas the prior minimal option in the Nashville market was over $12/person for roughly 15 people,” Stifel analysts wrote. “However, before taking a more constructive stance, we would like more details related to these initiatives.”

The pickup shelf in Denver was a window cut into the wall near the kitchen door with a sign above it designating it for digital orders.

“Not only did it provide significantly faster and more convenient mobile order and pick-up experience, but it served as in-store marketing that raised awareness among our customers standing in line,” said Niccol on the call, according to a FactSet transcript.

While windows won’t rollout everywhere, Niccol said there are “prototypes” being tested.

Stifel recently conducted a survey of consumer-focused investors to gauge sentiment in restaurant stocks and found that sentiment was “bullish” about Chipotle CMG, +0.28% with a majority of respondents expecting the Mexican chain to exceed earnings expectations and the stock to outperform in the near term.

Stifel rates Chipotle shares hold.

Thirty-three analysts polled by FactSet have an average hold rating on Chipotle stock with an average target price of $418.76.

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Here’s what to expect:

Earnings: FactSet and Estimize, which crowdsources estimates from sell-side and buy-side analysts, hedge-fund managers, executives, academics and others, are guiding for earnings per share of $2.80, up from $2.32 last year.

Chipotle beat earnings guidance the last two quarters.

Revenue: FactSet and Estimize expect sales of $1.26 billion, up from $1.17 billion last year.

Chipotle beat sales guidance last quarter, but fell short the previous three.

Stock price: Chipotle shares are up 34.4% for the last three months, and have rallied 57.4% for the year to date. The S&P 500 index SPX, -0.40% has gained 5% for 2018 to date.

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Other issues:

-UBS analyst Dennis Geiger think the turnaround is still being challenged by negative brand perceptions tied to food safety and negative traffic trends in a competitive landscape.

“In the absence of pricing, traffic would need to be up mid-single digits to leverage margins,” Geiger wrote in a note following the business update. “New initiatives across innovation, value, marketing, digital/delivery, etc. have potential to improve sales.”

UBS rates Chipotle stock sell with a $300 price target.

-RBC Capital Markets says its biggest takeaway from the business update was the digital opportunity. Digital sales currently account for 9% of sales.

“During the remainder of 2018, the company will be fully digitizing the ‘second make line’ to enable greater throughput for digital orders and embed delivery ordering in the Chipotle app,” RBC wrote. “With these steps in place, greater marketing eight to drive digital awareness, and the creation of a loyalty program in 2H18, we believe Chipotle could significantly ramp up digital growth.”

RBC rates Chipotle shares sector perform with a $360 price target.

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