Chipotle Mexican Grill shares took a beating today after a warning from Wal-Mart about recent wage hikes and downgrades from a couple of firms. However, a third firm has upped its price target and earnings per share estimates ahead of next week’s earnings report. The two firms that downgraded Chipotle were OTR Research and Vetr, while RBC Capital Markets was the one that raised its price target

Chipotle Mexican Grill, Inc. Gets PT Increase Pre-Earnings

Mixed views on Chipotle Mexican Grill

OTR Global analysts downgraded the fast casual food chain to Mixed, citing “plan attainment weakens.” The firm’s analysts think the company’s third quarter revenue will be less than expected and said overall trends for this month are “still soft,” reports Benzinga. OTR said seven of the 40 managers they surveyed believe that sales in the third quarter will be lower than what they had planned. In the last quarter, 13 of the 28 managers they spoke with expected sales to be higher than planned.

The managers also indicated that transactions were a bit weaker during the third quarter as compared to the second even though there was a surge driven by the buy one, get one Friend or Faux promotion. However, 28 of 40 managers said tickets during the third quarter were up, although “heavy coupon redemption” also weighed on sales, undercutting price increases on barbacoa and beef.

Vetr analysts downgraded Chipotle from Hold to Sell on Tuesday. Although there are not a lot of details on either firm’s downgrade (especially Vetr’s) of the fast casual food chain, they appear to be impacting its share price more than the price target increase from RBC Capital Markets.

Of course another reason (perhaps a bigger reason than OTR’s downgrade) Chipotle shares could be down today is Wal-Mart’s warning about sales and higher costs related to wage hikes, which has spilled across the retail sector and erased $20 billion from the retail chain’s market capitalization in a matter of minutes.

Analysis spurs increase for Chipotle

In a report dated Oct. 14, RBC analyst David Palmer said he maintains his Outperform rating but raised his price target from $740 to $825 per share. While OTR said trends at Chipotle Mexican Grill have been soft this month, Palmer said his “consumer panel analysis” suggests that the company will post strong sales. As a result, he has increased his growth estimate for same store sales from 2% to 3%. Consensus estimate suggests a 2.4% increase in same store sales.

The analyst also upped his 2015 earnings estimate from $17.16 per share to $17.39 per share and his 2016 estimate from $20.84 to $20.99 per share. Consensus estimates suggest $17.35 per share for this year and $20.65 per share for next year.

Why RBC thinks Chipotle’s sales are up

Palmer said his surveys suggest that both sales and traffic trends at Chipotle Mexican Grill have accelerated on both a two- and three-year basis. Some potential problems he noted in the second half of this year include “ineffective labor scheduling,” which he estimates to have a negative impact of 20 to 30 basis points, and wage and benefit increases for employees. He said both issues are expected to cost the fast casual chain $2.5 million per quarter and will probably cause “labor deleverage” in the second half of this year.

Interestingly, the RBC analyst said the stepped-up coupon mailings toward the end of the second quarter seemed to have boosted sales at Chipotle. He also said the Friend or Faux campaign appears to have had a positive impact in July and August. Further, the pork shortage began to ease, as the meat was back in 90% of stores by the end of the third quarter. This also had a positive impact on sales trend, according to Palmer.

Offsite ordering an opportunity for Chipotle Mexican Grill

The RBC analyst noted that thus far, Chipotle has not done much in offsite ordering, as it is only about 6% of total sales. However, he sees a big sales opportunity here, and he thinks the restaurant chain’s choice of Curt Garner as chief information officer is a “clear sign” that it plans to “increase its digital presence.”

Heading into next year, Palmer expects Chipotle Mexican Grill to look for more ways to convince customers to order ahead before thy come in. He noted that the company has already improved the interface on its mobile and web ordering platform. Also Chipotle is seeing improvements in customer satisfaction scores for offsite orders since those improvements.