Chipotle is hot and Starbucks hits pause: Analysts say cost inflation will weigh on restaurants in 2022

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The new year is just getting started, but with analysts that have already upgraded Chipotle Mexican Grill Inc. and downgraded Starbucks Corp., experts believe cost inflation will take a toll on the entire restaurant category.

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Chipotle CMG,
-1.43%
After performance at Oppenheimer was upgraded to outperform, analysts identified some factors that could drive business gains, in addition to Chipotlein, which offers drive-thru order pickup service and strategic pricing.

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Oppenheimer has a $1,925 price target on Chipotle shares.

“We believe same-store sales drivers remain as powerful as digital, loyalty, marketing, innovation,” wrote analysts led by Brian Bittner.

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“Digital has represented a business transformer at 43% of sales (versus 20% pre-pandemic) and has enabled access to a powerful loyalty base of 24.5 million members (and growing),” he said.

Taco Bell takes on taco membership program nationwide

Pricing at fast-casual chains has a place, too.

“This further forecasts our restaurant margin expansion over the next two years, despite the industry’s inflationary headwinds,” Oppenheimer said.

In the same report, Oppenheimer downgraded the Starbucks SBUX,
-3.21%
To outperform.

“As we turn to 2022 and 2023, our in-depth analysis shows that the financial model now lacks a lever for the ‘beat and rage’ thesis,” Oppenheimer said.

“2022 represents an ‘investment year’ and its margin headwinds are well understood… Wait for it to become faster.”

Starbucks was also downgraded from outperform to sector performance at RBC Capital Markets. Analysts cut the price target by $2 to $122.

,[T]That ongoing investment in its employees is critical to Starbucks’ operating strategy and principles, and is likely the right decision for the business over the long term,” wrote analysts led by Christopher Carrill.

“We believe this to be the case, but given the magnitude of cost pressures in FY22, we see the potential for debate around the timing of a return to Starbucks’ ongoing target of 18-19% operating margin.”

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Despite the change in ratings, RBC says much will remain the same from 2021 to 2022.

Analysts said in a separate note, “Our broad thesis for the group remains unchanged from 2021, as we continue to support long-term restaurant growth stories — supported by relatively strong and/or improved unit economics — at low rates.” Amidst the backdrop of industry supply.” ,

“However, given the ongoing cost inflation concerns, in the very near term we prefer stocks of highly franchised restaurant companies over the company-owned model.”

Domino’s Pizza Inc. DPZ,
-3.05%,
Burger King parent restaurant Brands International Inc. QSR,
-0.72%,
McDonald’s Corp. MCD,
-0.98%
and Jack in the Box Inc. jack,
-0.39%
Franchise restaurants are RBC’s top choice for businesses. All have been rated as outperformers.

Among company-owned businesses, RBC’s top picks are Chipotle, Sweetgreen Inc. SG,
+0.22%
and Olive Garden’s parent Darden Restaurants Inc. DRI,
-0.45%

Chipotle, Darden and McDonald’s are also top choices for UBS analysts. Analysts there called Texas Roadhouse Inc. upgraded TXRH,
-0.86%
To buy from neutral.

“We believe shares are already priced in the expectation that food and labor pressures will continue to impact margins through at least 1H,” analysts said.

“And a potentially big move in 2H margins and a focus on improving ’23 margins and earnings power drives.”

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Analysts at UBS say the restaurant landscape will improve as the year progresses.

“We expect 2022 to be a tale of two halves, with cost inflation likely to be more intense in 1H, with strong 2H margins and higher pricing still supporting profitability,” the report said. Having said.

Chipotle stock has fallen 13.5% over the past three months, but is up 16.8% over the past year.

Starbucks shares have fallen 4.1 percent in the past three months and are up 4% in the past 12 months.

Benchmark S&P 500 Index SPX,
-0.41%
23% up in the last 12 months.

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