Chipotle Establishes 2018 as a Transition Year
Investors need to focus more on longer-term unit potential after results that were bogged down in the third quarter.
While the decision to pull back 2018 store openings to 130-150 (versus a five-year average of 200) certainly calls into question its ultimate store potential--we still forecast 4,000 versus management's target of 5,000--we believe it is prudent to adopt a more prudent pace store opening schedule while focusing on customer experience and digital/store utilization initiatives. While Chipotle's other sales drivers are a show-me story, we think the generally positive consumer response to queso (which has had a 4%-6% comp benefit since launch despite reports of tepid consumer reaction) bodes well for future beverage, dessert, and salad innovations. Additionally, mobile ordering, utilization of its second assembly line, and a 5% price increase in 900 restaurants in November offer support for our outlook for 2%-3% comps in 2018.
We plan to trim our near-term top-line growth and margin assumptions, reducing our $400 fair value estimate by 5%-10%. While investors must be willing to accept some quarter-to-quarter volatility, we believe Chipotle may be worth a look for longer-term investors now that we have greater visibility about what to expect in 2018.
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