The Moment Of Truth For Chipotle

rollandthomas (74)in #money • 6 years ago

After years of news flashes of Chipotle food making people sick, Chipotle hired a new CEO, Brian Niccol earlier this year. At Taco Bell, Niccol was known for food menu innovation as well as driving technological advancements to the customer ordering process.

Shares of Chipotle Mexican Grill, Inc. popped on Friday after the company beat expectations on both the top and bottom lines on its second-quarter earnings. Chipotle reported $1.3 billion in sales, up 8.3% from last year and earnings of $2.87 per share. Wall Street estimates were looking for $1.26 billion in sales and $2.78 earnings per share.

I love, love Chipotle food. I actually have a store near my home. However, I haven't been there since winter. I cannot tell a lie, my family and I have been going to Smashburger in lieu of Chipotle.

So it made since when the company stated the comparable transactions declined 1.8%. So how did they beat earnings estimates, if their traffic declined? They increased their prices by 4%. It also helped that their food cost decreased as well. Both factors helped increase margins and offset the decline in food traffic. But at some point, Chipotle won't be able to continue to increase prices as customers will seek out other food alternatives.

However, Niccol has something up his sleeves. Digital sales grew by 33% and delivery sales were up 300% in the second quarter. Another way to put this in perspective is online orders were $17 each vs. in store orders of $12. Niccol is hoping that more and more customers will skip other eateries and just order their food at Chipotle.

PiperJaffray’s Nicole Miller Regan reiterated an Overweight rating on Chipotle with a $530 price target. However, I think it's the moment of truth for Chipotle. Price is in a monthly supply zone at $490 currently. If price is going to move higher, the buyers must win the battle with the sellers in this zone. What helps the buyers are they have back-up with more buyers at the $420 level. The chart suggests it's going to be tough for the buyer to push price higher over next $90 points and there is more risk to the downside because technically still down on the monthly chart.