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

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

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

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

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The fast-casual chain also has wiggle room in pricing.

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

In the same report, Oppenheimer downgraded Starbucks
SBUX,
-3.21%
to perform from outperform.

“As we turn to 2022 and 2023, our deep-dive analysis suggests the financial model now lacks the levers for a ‘beat and raise’ thesis,” Oppenheimer said.

“2022 represents an ‘investment year’ and its margin headwinds are well-understood… We continue to believe same-store sales trends and unit growth drivers are firmly intact, but wait to uncover new drivers of outperformance to become more bullish.”

Starbucks was also downgraded to sector perform from outperform at RBC Capital Markets. Analysts shaved $2 off of the price target, to $122.

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

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

Also: Shoppers are willing to pay more for Cheerios and Frosted Flakes despite inflation concerns

Despite the change in rating, RBC says much will stay the same moving from 2021 to 2022.

“Our broader thesis for the group remains unchanged from 2021, as we continue to favor long-term restaurant growth stories— supported by relatively strong and/or improving unit economics—amid a backdrop of reduced industry supply,” analysts said in a separate note.

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

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%
are RBC’s top choices for franchised restaurant businesses. All are rated outperform.

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

Chipotle, Darden and McDonald’s are the top picks for UBS analysts as well. Analysts there upgraded Texas Roadhouse Inc.
TXRH,
-0.86%
to buy from neutral.

“We believe shares already price in expectations that food & labor pressures will continue to weigh on margins at least through 1H,” analysts said.

“And a potential sizable step up in 2H margins and focus on a recovery in ’23 margins & earnings power drive upside.”

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UBS analysts say the landscape for restaurants will improve as the year progresses.

“We expect 2022 will be a tale of two halves, with cost inflation likely more acute in 1H, with likely still elevated pricing supportive of stronger 2H margins and profitability,” the report said.

Chipotle stock has tumbled 13.5% over the past three months, but has gained 16.8% over the last year.

Starbucks shares have slipped 4.1% for the past three months and is up 4% for the last 12 months.

The benchmark S&P 500 index
SPX,
-0.41%
has run up 23% over the last 12 months.