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Stock Analyst Update

Chipotle Set to Aggressively Pursue Market Share

We plan to raise our fair value estimate to reflect future market share gains, but shares are still overvalued.

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With Chipotle (CMG) posting exceptional January/February sales (comps up 14.4%, including 11% transaction growth) and weathering COVID-19 closures better than most restaurants (comps down 16% in March due to strong digital ordering engagement versus the 25%-40% decline we've seen for many quick-service/fast-casual operators), our focus now shifts from near-term disruptions to longer-term market share opportunities. Despite government assistance, we believe at least 30% of the 1 million U.S. restaurant locations are at risk of permanent closure in the next 12-18 months, which will leave narrow-moat Chipotle--as well as other wide- and narrow-moat restaurant names--primed to take advantage.

What gives us confidence in Chipotle? (1) The company is operating from a position of financial strength, with $909 million in cash and no debt at the end of the first quarter, access to a $250 million-$500 million credit facility if needed, and an additional $100 million from CARES Act tax deferrals. (2) Because of reduced labor hours due to an uptick in digital orders (70% of sales in April), Chipotle is posting break-even restaurant profits at comp declines of 30%-35% and break-even corporate EBITDA under the high teens comp declines it saw during the second week in April. (3) Digital ordering (including a 150% increase in delivery and 120% order-ahead) and loyalty program adoption should create greater customer engagement. (4) We expect the company to be aggressive filling restaurant real estate availability with its new Chipotlane formats, suggesting a meaningful acceleration in future restaurant openings. Finally, because of employee investments, including 10% assistance pay for crew and discretionary bonuses for managers, we expect Chipotle will face fewer staffing issues than other operators.

We plan to raise our $675 fair value estimate by 10% to reflect future market share gains. The shares still strike us as overvalued, but we don't see many downside catalysts on the horizon.

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R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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