Chipotle Mexican Grill Inc. (CMG, Financial) was badly hurt in 2016 due to several food safety issues as well as poor management. Although the stock was down almost 22% in 2016, it has performed amazingly well heading into 2017 as it up 28% year to date.
Despite showing impressive performance this year, the stock still trades 35% below its all-time high, indicating it has plenty of room to move upward.
Chipotle reported robust first-quarter results on April 25. For the quarter, the company recorded earnings per share of $1.60, surpassing the analysts' estimates by a wide margin of 33 cents. On the other hand, the company reported revenue of $1.07 billion, again surpassing the consensus by $20 million. Moreover, that figure represents an increase of 28.2% year over year compared to -23.4% in the same quarter a year ago.
Most significantly, after missing revenue estimates for the past nine quarters, Chipotle finally managed to beat estimates in the first quarter. Furthermore, the company’s comparable restaurant sales grew 17.8%. The company opened 57 new restaurants during the quarter and remains focused on its goal of establishing 195 to 210 new locations this year.
Chipolte's marvelous performance can be attributed to its belligerent focus on improving food-safety measures as well as the execution of digital ordering. The company’s management reported digital orders increased 53% on the back of a better pick-up time technology as well as the second make line, a team of workers that prepare online orders at a prep table in the kitchen.
Recently, the burrito chain announced it has eliminated all artificial flavors, colors and preservatives from its menu. Considering all the issues food-borne illnesses have caused for Chipotle over the past two years, it looks like the company has made the right move as it should help bring health-conscious consumers back to its stores.
Furthermore, this move will also help it compete effectively against its peers, who have also been upgrading their menus with healthier options and revamping ingredients.
All in all, it looks like the company’s damaged reputation is starting to improve with each passing quarter.
Summing up
Chipotle disappointed shareholders in 2016, but it is off to an amazing start this year. The burrito chain is taking steps to repair its damaged brand image. Moreover, the stock also received a buy rating from SunTrust with a price target of $550.
Since December, the traffic at Chipotle has continued to grow at a strong rate. If the growth continues in the year ahead, the stock will certainly move upward. While this was the first quarter in which the company displayed strong signs of turnaround, shareholders should not completely trust that it is out of the woods just yet.
As a result, I recommend investors wait for the right time before initiating a position in the stock.
Disclosure: No position in the stocks mentioned in this article.
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