Chipotle Mexican Grill, Inc. CMG was once the darling of Wall Street with revenues exhibiting stunning growth, supported by solid comparable restaurant sales (comps) improvement. However, the Colorado-based fast casual restaurant fell from grace toward 2015-end, as a series of E. coli and norovirus contamination issues wrecked its fairytale growth story.
Chipotle has been reeling under the negative publicity associated with the E. coli outbreak which started in Oregon and Washington at the end of Oct 2015andlater spread to seven other states. Sales have taken a severe hit post the outbreak and last December, the company withdrew the 2016 comps outlook due to volatile sales trends.
Negative publicity due to the health scare caused by the E. coli and norovirus infections is expected to continue to hurt restaurant traffic, and in turn, the company’s top line
In addition, the company expects both margins and earnings to remain under pressure in the near term due to lower sales, increased discretionary costs, such as marketing and promotional expenditure, as well as higher legal expenses, and costs to support its newly designed food safety program.
Earnings per share (EPS) are projected to nosedive more than 100% in the current quarter for this Zacks Rank #5 (Strong Sell) stock.
Chipotle might have lost its sheen, but there are other restaurant stocks, like Starbucks Corporation SBUX, which are performing well.
Starbucks’ Growth Story
A cafe that started its journey with a store in Seattle’s Pike Place Market way back in 1971 has now become synonymous with coffee. It expanded massively after the original owners sold the chain to present chairman and CEO, Howard Schultz, in 1987. Starbucks has come a long way since its Initial Public Offering in 1992 and currently operates 23,500 stores across 70 countries.
Outside the U.S., Starbucks debuted in Tokyo in 1996 and now operates more than 1,000 stores across Japan. At present, the company runs more than 2,000 outlets in China, over 870 outlets in 15 Latin American markets and around 800 stores in the U.K. through international partners.
From espresso and specialty roast and ground coffee to premium single-serve market, the Seattle-based company commands a leading position in all coffee segments. Inaddition to fresh, rich-brewed coffees, Starbucks offers many complementary food items like pastries and snacks as well as a selection of premium teas and other beverages. It also offers breakfast sandwiches, lunch items as well as wine and beer at select evening stores.
Moreover, Starbucks sells roasted whole beans and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages and Starbucks and Tazo branded K-Cup packs through grocery, specialty retailers and foodservice channels.
With a market cap of almost $87 billion, the company is increasing its global market share by judiciously opening stores in new and existing markets, remodeling existing outlets, deploying technology, controlling costs and investing in aggressive product innovation and brand building.
New Digital Efforts
Starbucks’ technological innovations should further strengthen its brand, enhance efficiency and in-store execution while boosting profitability.
The coffee giant’s latest digital initiative, Mobile Order and Pay, is witnessing increased usage and could prove to be a key growth driver in 2016 as adoption increases. This initiative allows customers to order before arriving at a Starbucks café and pick up the items at their selected Starbucks outlet, thus saving time. The company currently processes over 6 million transactions every month under the service, which is being deployed in many international markets.
Starbucks started food and beverage delivery service through its employees at New York’s Empire State building last October. The company also began testing food and beverage delivery in collaboration with on-demand delivery service, Postmates, in select areas of Seattle in Dec 2015.
These digital initiatives are expected to quicken service, increase convenience and enhance customer loyalty thereby driving mobile payment transactions and spurring traffic.
In order to expand its loyalty program, Starbucks formed strategic loyalty partnerships with Lyft, Spotify and The New York Times under which these partners will purchase Starbucks stars that will be rewarded to their customers as loyalty points and subscriptions. The third-party loyalty program further leverages Starbucks’ digital ecosystem and generates additional revenues.
Massive Sales Growth
The company’s sales growth has been strong over the past four quarters driven by solid global traffic trends and higher food/beverage sales.
We believe that Starbucks’ digital efforts like Mobile Order and Pay, delivery services and third-party loyalty partnerships, food and beverage innovation, lunch and evening programs, Starbucks Reserve premium coffees and Teavana teas should fuel stronger comps growth in the Americas in fiscal 2016.Comps guidance of “somewhat above” the long-term mid single-digit target for the fiscal year reflects management’s improved sales visibility.
The Numbers Say it All
Starbucks has a Zacks Rank #2 (Buy) and a favorable growth style score of ‘A’. The Growth Style Score combines conventional growth metrics with a thorough analysis of the company’s income statement, balance sheet and statements of cash flows to evaluate its financial health and the sustainability of its growth trajectory. Back-tested results show that only stocks with a Growth Style Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best upside potential.
Starbucks’ shares have had a good run last calendar year, gaining a massive 49%. The stock gained only 1% year-to-date, maybe due to broader equity market concerns.
The company has a long-term EPS growth rate of 17.6%. For the current quarter, EPS is projected to rise 18.61%. For the current year, the projected EPS and sales growth rates are 19.75% and 12.1%, both outperforming industry numbers of 13.28% and 4.85%, respectively.
In view of the above discussion, Starbucks appears to be a much better investment option at present than Chipotle.
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