Chipotle Mexican Grill, Inc. (NYSE: CMG) stock jumped more than 10 percent in February when the company named former Taco Bell head Brian Niccol as the new CEO. However, analysts say Niccol has few viable options for jump-starting sales, and the stock is still pricing in an unrealistic amount of optimism.
Investors seem to thing Niccol will make a push for Chipotle to prioritize a breakfast menu after he spearheaded the launch of breakfast offerings at Taco Bell. But while Taco Bell breakfast was a smash hit, BMO Capital Markets analyst Andrew Strelzik says it only has roughly a 50/50 chance of success at Chipotle.
“Introducing breakfast at CMG likely would draw a favorable investor response and drive comp momentum, but it may not be accretive to [earnings per share] and almost certainly would be dilutive to restaurant margins,” Strelzik says.
[See: 8 Ways to Satisfy a Craving for Restaurant Stocks.]
He says Chipotle’s breakfast prices would need to be in the $5.50 to $6.00 range to be competitive and points out that it took McDonald’s Corp. ( MCD) eight years to turn a profit on its breakfast menu.
Strelzik says another option for Chipotle is a full interior and exterior remodel of its existing restaurants, an expensive endeavor that would likely take five years to complete. Wendys Co. ( WEN) reported a 7 to 10 percent increase in same-restaurant sales following a similar remodeling push. Strelzik estimates that a complete remodel would cost between $75 million and $125 million per year.
In addition, Chipotle could invest more heavily in marketing and digital sales, but costs associated with either would eat into margins. Strelzik says Chipotle has spent just 2.5 percent of annual revenue on marketing since 2015 compared to an average of 3.5 percent to 4 percent among its peer group.
Finally, if one or more of those initiatives start to improve Chipotle’s sales growth, the company could ramp up its new store growth as well.
Unfortunately for Chipotle investors, Strelzik says none of Niccol’s options are quick, easy, cheap or guaranteed to work.
“If investors are comfortable underwriting an extreme bull case scenario, there is a big upside opportunity and even the base optimistic scenario would be intriguing, but there is also risk of an extremely poor outcome and too many moving parts for us to become constructive at this time,” Strelzik says.
[See: 10 Stocks Already in a Bear Market.]
BMO has a “market perform” rating and $275 price target for CMG stock.
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Chipotle Mexican Grill, Inc. (CMG) Investors Expect Too Much From New CEO originally appeared on usnews.com
