Chipotle Mexican Grill (CMG) Upgraded to 'Strong Buy' at Raymond James as Higher Menu Pricing Likely to Stick

June 14, 2021 9:29 AM EDT
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Price: $1,861.00 -0.13%

Rating Summary:
    29 Buy, 15 Hold, 1 Sell

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    Up: 18 | Down: 13 | New: 23
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Raymond James analyst Brian Vaccaro upgraded Chipotle Mexican Grill (NYSE: CMG) to ‘Strong Buy’ from ‘Outperform’ to reflect higher pricing introduced by the company earlier this month.

Higher menu pricing is here to stay, says Vaccaro, and adds that more hiking is due this fall. This should provide a boost to 2H comparable sales and 2022 EPS.

The raised pricing “creates 1) significant upside to 2H consensus comp expectations and 2) increased confidence in our above-Street '22 EPS estimates (RJE $35.47 vs. consensus $32.50),” the analyst says in a note to clients.

“We believe Chipotle has a very strong value proposition (chicken burrito still sub-$8 in many markets; see Exhibit I) and that price increases to cover higher wages will result in limited customer resistance. While recent wage increases will require an adjustment to management's margin recovery algorithm (expected on 2Q call), we remain confident in its ability to recapture best-in-class store margins (25%+) in 2022 (assuming AUVs ~$2.8M). We also remain bullish on the company's ability to reaccelerate unit growth into the high-SD % range over the next couple of years while sustaining powerful ROIs (40-50% initially, increases to 60%+ in subsequent years),” the analyst says in a note.

The analyst is projecting Q3 and Q4 comp +13%/15% above consensus (+9%/10%) and even that could prove conservative.

“We believe average weekly sales (AWS) were in the $52-53K range in April (based on two-year comments per 1Q CC). Layering in the benefit of higher pricing (vs. April) in 3Q (~4%) and 4Q (RJE ~6%, assuming take 2% in the fall) and adjusting for normal seasonality (3Q/4Q typically 2-4% below 2Q) and modest resistance, it seems plausible that AWS could sustain in the $52K range (supporting 2-3% comp upside vs. our Street-high estimates). Beyond 2H, we also remain optimistic that AUVs can build as dine-in traffic increases and digital sales likely sustain well above pre-COVID levels.”

Raised menu pricing came about a month after CMG said it is raising wages for hourly and salaried employees to a $15 average hourly wage by the end of June. The margins will also be protected with another pricing this fall, the analyst adds.

“We now expect 1) y/y menu pricing in the 9-10% range in 2H21 and 6-7% range in 1H22, 2) ~$250M wage increase to result in labor cost per week increasing by ~$1.6K to ~$14K/week, and 3) higher pricing to drive COGS into the low 29% range.”

“We are raising our 2Q21 EPS estimate $0.10 to $6.73, reflecting raised AWS of $52.1k and store margins of 23.7%. We are lowering our 2021 EPS estimate by $0.91 to $24.71, which embeds 3Q/4Q AWS of $50.9k/$51.4k, 3Q/4Q comps of +13.0%/+15.0%, and 2H store margins just under 23%. Our '22 EPS estimate is tweaked to $35.47 which assumes comps +7.3%, AUV's of $2.8M, and store margins of 25.5%.”

A target price for CMG at Raymond James is $1,800.00 per share, signaling a potential upside of over 30%.



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