Chipotle Could Take A Clue From Starbucks

Goldman Sachs says Chipotle Mexican Grill, Inc. CMG could take a clue from Starbucks Corporation SBUX as the company reorients its marketing strategy, which the brokerage feels is a right move.

Starbucks started focusing more on lower frequency customers in 2010-2012 with the help of better customer data and that helped reinvigorate its sales.

“It did take time and significant investments to develop digital capabilities, but we believe much of the success of its loyalty and digital engagement has come from driving additional occasions among less frequent users,” analyst Karen Holthouse wrote in a note.

Holthouse, who has a Neutral rating on Chipotle shares, believes reorienting from discounts to more traditional marketing/digital opportunities could boost sales meaningfully in 2017.

Meanwhile, the analyst sees areas of margin expansion, but investors may need more proof from Chipotle and could take time in buying in to this thesis.

“The supply chain (where growth in higher quality proteins, etc. could create additional opportunities for more competitive bidding) and reorienting managers’ focus to best execution after 2016 disruptions stand out. That said, investor buy-in on cost savings could require more specifics from CMG,” Holthouse elaborated.

The analyst warned investments in digital could offset prospective cost savings despite acknowledging that the investments could propel Chipotle to a stronger competitor over time.

As such, the analyst cut 2016-2018 EPS estimates to $0.79/$7.76$/11.09 from $2.26/$7.65/$12.08. Holthouse also slashed the price target to $445 from $490.

Shares of Chipotle closed Wednesday down 9.28 percent to $368.02.