Real Estate Is Chipotle's Competitive Advantage

Wedbush’s Nick Setyan believes Chipotle Mexican Grill, Inc. CMG's access to favorable real estate has been “the envy of the category precipitating a virtuous cycle of increasing brand equity, higher volumes and an increasing volume gap relative to competition.”

However, Setyan maintains an Underperform rating on the company, with a price target of $370, saying that while real estate is a moat, it is "also a challenge moving forward."

Real Estate Advantage

The analyst mentioned that the real estate footprint created by Chipotle Mexican Grill cannot be replicable by others in the category today, which provides the company “a large moat.”

While the company occupies most of the best real estate in its target markets, it is building an “increasing mix of incremental units” in “relatively inferior locations in dense/urban markets and in less dense, less urban markets,” Setyan noted.

However, the analyst believes these incremental units are unlikely to witness volumes similar to the existing base, regardless of the food crisis.

In addition to the real estate advantage, Chipotle Mexican Grill is working on its “Food with Integrity” message and positioning, which could help sales volume recover 90 percent of the pre-crisis peak.

Path To Recovery

Setyan also believes the recent operational changes at the company were an indication that management “may have pivoted from a strategy of regaining lost sales in the near-term to a focus on profitability at current sales run-rates.”

The largest margin opportunity for Chipotle Mexican Grill is likely to come from labor costs, since the company has historically over-invested in labor.

“However, such overinvestment drove employee loyalty and commitment, and was a key enabler of the company's growth strategy,” the analyst added.

Setyan also believes the company is unlikely to undertake any price hikes at least until 2018.