Chipotle's turnaround is 'undeniable' — but there's a catch

Hollis JohnsonChipotle’s turnaround is in full swing.
  • Chipotle’s turnaround is in full swing, winning over customers and analysts with new menu items, deals such as free guacamole, and a new rewards program.
  • Analysts are expecting a massive boost in same-store sales in the chain’s first quarter, thanks to a free delivery deal and the launch of its rewards program.
  • However, with Chipotle shares up 65% since the start of the year, analysts are cautioning against assumptions that the chain will reach the highs of its pre-E. coli scandal glory days.

Chipotle is thriving – but its explosive start to 2019 might be causing some to overestimate the chain’s comeback.

Shares of the fast-casual chain are up 65% since early January. In the early months of 2019, Chipotle has won over customers and analysts with new menu items, deals such as free guacamole, and a new rewards program.

On Thursday, Gordon Haskett released analysis of Chipotle credit card and mobile app data that indicated the chain’s same-store sales increased a whopping 9.5% in the first quarter, well above the current average estimate of 6.7%. (Chipotle will release official figures for the quarter in late April.)

According to Gordon Haskett analyst Jeff Farmer, Chipotle’s free delivery deal that ran from mid-December to early January drove the strongest same-store sales that the chain has seen in the past year.

Chipotle’s rewards program, launched in mid-March with the promise of free guac and the possibility of free money, reached 1 million members in just 10 days. Mobile app data provided to Gordon Haskett by SimilarWeb indicated Chipotle’s app went from an average of 8,000 daily active users to more than 25,000 following the launch of the new rewards program.

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Jeffries analyst Andy Barish expects the chain’s rewards program to have grown to three million members by the end of 2019, according to a note released on Thursday. By 2020, that figure is estimated to reach six million.

However, analysts say it is too early to assume the chain is on its way to speedily returning to the highs of its pre-E. coli crisis golden era.

“CMG’s SSS [same-store sales] momentum is undeniable, but we believe the all-time high valuation materially overstates the company’s ability to: (1) deliver a multi-year run of mid-single digit or better SSS growth and (2) convert the ongoing average unit volume recovery into restaurant EBITDA and margin levels that were seen before the food safety headwinds emerged in late 2015,” Farmer writes.

On Thursday, Jeffries lowered its rating of Chipotle to a hold from buy, with Barish saying that beef costs, delivery commissions, and increased marketing could cut into margins. A recent spike in avocado prices, linked to President Donald Trump’s discussion of closing the border with Mexico, also sparked concerns.

“Although we believe that there are strong fundamental drivers still to unfold for CMG … the earlier than expected loyalty program roll-out and good SSS checks have propelled the stock,” Barish writes.

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