For the past year, Chipotle Mexican Grill (NYSE: CMG) has been struggling to recover from the damage its reputation incurred following its E.coli crisis in late 2015. Store traffic has declined, while the company has had to spend more on marketing expenses and food safety checks. However, it appears that there may finally be some good news for the company, as its recovery efforts are showing signs of bearing fruit. According to Market Force’s survey, Chipotle Mexican Grill has regained its number one rank among the top U.S. Mexican chains. The company scored 57% in the survey, narrowly beating Moe’s Southwest Grill and El Pollo Loco, which both scored 55%. The survey respondents stated that Chipotle had the best speed of service, food quality, overall cleanliness and curb appeal. This is extremely encouraging for the company, which has been working hard to rebuild its reputation after the virus led to a series of illnesses among its customers. In Q4 2016, Chipotle reported a nearly 4% year on year increase in its revenues. While this was primarily because of weak revenues reported in Q4 2015 – which was immediately after the food scandal – it still indicated that the company is on a recovery path. Chipotle recently rolled out its “Smarter Pick Up Times” technology to all its restaurants that offer digital ordering. This is likely to reduce wait times at its restaurants and allow the company to serve its customers more efficiently.
As it continues to work to regain its reputation, Chipotle could see a recovery in store traffic, which would positively impact its valuation. According to our estimates, the average number of visits per Chipotle restaurant per year will increase steadily from 191,000 in 2017 to 210,000 by the end of our forecast period.
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However, if the company’s efficient service and high quality of food (as it regains its reputation) is able to attract more customers to its stores, and the number of visits per restaurant increases at a more rapid pace, there could be a significant upside to our price estimate. For instance, if this metric reaches 235,000 by the end of our forecast period, there would be a more than 10% upside in our price estimate.
The Market Force survey is an indication of increasingly positive sentiment around Chipotle. The company previously ranked no. 1 in the survey in 2015, but lost the top spot in 2016. While regaining the number 1 position is a good start, indicating that customers are comfortable with the company’s efforts on food safety and quality, there is likely quite a bit more work to do. The improved brand strength may not directly translate into higher comparable sales, but it is a sign that Chipotle is on a recovery path.
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