Do Chipotle's Sales Drivers Justify An Outperform Rating?

BMO is encouraged that Chipotle Mexican Grill, Inc. CMG is beginning to execute on several initiatives that could represent both near- and long-term sales drivers.

A key investor concern regarding Chipotle has been that same-store sales growth was slowing more than expected, even before the various food safety issues arose. Further, the absence of long-term sales drivers limited the company's ability to sustain same-store sales momentum afterward.

That said, Chipotle is beginning to execute on several of the often-cited long-term sales driving opportunities with last week's announcements of its rewards program and the addition of chorizo as a new menu item.

"[T]he combination of favorable rewards and chorizo-related news flow could have near-term sales benefits following the slower than expected same-store sales recovery over the past six to nine months," analyst Andrew Strelzik wrote in a note.

Chipotle's rewards program significantly enhances its ability to identify and target specific customers for direct marketing.

"While the rewards program's design may have flaws, 'Chiptopia' likely represents an initial offering that could evolve in terms of structure and platform," Strelzik said.

Related Link: Chipotle Launches "Chiptopia" Loyalty Rewards Program

Further, the analyst said "Chiptopia" and chorizo may represent the first of a broader list of long-term sales drivers, including broadly enhanced mobile capabilities and changes to better use the second-make line.

In addition, BMO's informal surveys indicate the addition of chorizo to the menu has been well received by customers, and traction may be pacing ahead of expectations.

Strelzik reiterated his Outperform rating and $550 target price, which implies 39 percent upside.

At the time of writing, shares of Chipotle gained 0.66 percent on the day to $398.99.