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Can a New Dessert Save Chipotle Stock?

By Rick Munarriz – May 2, 2017 at 2:25PM

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Bunuelos will be rolling out to see if the chain can cash in on a burrito lover's sweet tooth.

Shares of Chipotle Mexican Grill (CMG 1.65%) hit fresh 52-week highs last week after posting better-than-expected financial results. However, with the stock and the underlying fundamentals still well off their peak 2015 form, it's not as if the burrito roller can afford to stand still. Chipotle is developing a pair of dessert items that it will soon begin testing in stores, hoping that catering to the sweet tooth will boost per-check averages, if not actual foot traffic. 

Chipotle has been keeping the identity of the meal enders a secret since announcing its push into desserts late last year. However, it did announce during last week's earnings call that one of them will be bunuelos. The sweet treat is made many different ways throughout Latin America. Bunuelos can be flat or puffy. They can be made with sweet potato, dough, cassava, or in Chipotle's case, fried tortilla strips. They are then sweetened with honey, cinnamon, and sugar, served with a cup of apple caramel butter for dipping. 

Bunuelos can be made with Chipotle's existing equipment. It will just need to stock a few more ingredients to make it happen. It's a no-brainer as long as the process doesn't slow down the assembly line. It will be incremental to Chipotle orders, and the new treat may even inspire a cult following.

The interior of a Chipotle store on Sunset Blvd. & Vine in California.

Image source: Chipotle Mexican Grill.

From treats to tricks

Chipotle may seem to be doing well judging by last week's blowout quarter, but the turnaround is far from complete. Revenue is still lower than it was two years ago, despite operating nearly 400 more restaurants now. Chipotle's quarterly profit was less than half of what it rang up during the first quarter of 2015.

Comps rose 17.8% for the quarter, but it's important to remember that same-restaurant sales plunged 29.7% a year earlier. Let's also not make a rookie math mistake by suggesting that comps rising nearly 18% this time around means that Chipotle is more than halfway to a recovery. Comps actually have to rise by a little more than 42% to offset a 29.7% decline.  

Adding a new item -- or two, if it eventually rolls out both desserts -- won't turn things around overnight. The introduction of chorizo last year couldn't push sales up to 2015 levels. However, with the brand's reputation already starting to recover from the fallout of the food-borne illness outbreaks of late 2015, it's a good a time as any to see if it can dig deeper into the pockets of its patrons. Chipotle stock was still 34% below its all-time peak at last week's post-earnings highs. It's going to take time and meticulous execution to get back to the top, but extending meals with ticket-inflating treats should help it get there sooner rather than later.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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