A Chipotle Bull Sees Good News for the Stock as Marketing Costs Increase


David Marino-Nachison

Dec 10, 2018

Chipotle Mexican Grill ’s (CMG) efforts to reestablish the brand in the minds of consumers should help the company’s bottom line, a Chipotle bull wrote Sunday.

The company has boosted marketing spending in 2018, notably launching a new ad campaign in the fall—its first major national one since new management took over earlier this year. That campaign came with a new “voice” for the brand.

“The company is increasing Chipotle brand awareness through marketing efforts that today promote brand equity, but with a long-term plan that incorporates calls to action and iconic visual elements,” PiperJaffray analyst Nicole Miller Regan wrote. “Awareness drives same-store sales.”

Regan reiterated an Overweight rating and a $550 price target that is among Factset’s highest, and about 19% above the average. Chipotle stock, up nearly 63% this year, was recently about flat near $465.

She also boosted her fourth-quarter same-store sales growth estimate by 1% to 4%, which is slightly below Factset’s average. In her note, Regan said that every 1% increase in same-store sales is worth approximately $0.48 in earnings per share.

“The company recently launched its ‘For Real’ TV campaign and what is an approximate 9- to 12-month pipeline has been set in motion,” Regan wrote. “Marketing may also prove to a be a powerful method to promote menu innovation where the company is currently validating its process, testing, and investing in equipment to build a more robust pipeline.”

We’ve covered some of Chipotle’s plans to tweak its menu, which is part of a plan to widen service hours, experiment with meal “bundles,” and give consumers more reasons to visit. The plan is matched with efforts to speed service and boost store efficiency and to encourage more loyalty while reducing “friction” via technology.

That’s particularly important with the restaurant industry expecting labor costs to increase in 2019. In a recent report, Gordon Haskett said labor costs for a group of 20 companies were seen up an average of 32% for 2018. It believes projections suggesting only a slight uptick for next year are “wildly optimistic.”

“Managing throughput is instrumental in terms of unlocking friction and increasing sales,” wrote Regan.