Chipotle's Long Road to Recovery Comes Into Focus as Sales Drop

Chipotle: The Complete History in About Three Minutes
  • Restaurant chain reports first loss since going public in 2006
  • Fallout from food-safety crisis continues to weigh on sales

Chipotle Mexican Grill Inc.’s most recent results show that the company has yet to turn the page on the food-safety crisis that has dogged it for half a year.

The restaurant chain posted its first quarterly loss as a public company Tuesday as same-store sales plunged for the second straight quarter. And so far, April hasn’t been much better. Even as the company ramps up its marketing and woos customers with coupons, sales still have dropped 26 percent, excluding the benefit of an early Easter.

The results reminded investors that the company faces a long road to recovery. The shares plunged 4.4 percent to $426.20 at 9:52 a.m. in New York, deepening its slump for the year to 11 percent. Chipotle had faced slowing growth even before an E. coli outbreak sickened dozens of customers last fall. Now, the company is fighting to stem steep declines in sales and profit, and analysts are finding it difficult to predict when a rebound may occur.

“We are increasingly uncertain about the timing of the recovery,” Peter Saleh, an analyst at BTIG, wrote in a research note Wednesday as he downgraded Chipotle’s shares to neutral. “We had anticipated stronger sales trends in April following the significant promotions in February and March, and the lack of a more discernible improvement leaves too much uncertainty.”

Revenue Falls

Revenue tumbled 23 percent to $834.5 million in the first quarter, the Denver-based company said in a statement Tuesday. Same-store plummeted 29.7 percent. The loss in the quarter was 88 cents a share, compared with profit of $3.88 a year earlier. Analysts predicted a loss of $1.05, on average. The figures may not be comparable.

Chief Financial Officer Jack Hartung said Tuesday that he expects the company to return to profit in the second quarter. The company has said since last year that it can regain its profit margins and sales as it moves beyond the food-safety crisis. In addition to increased marketing spending, Chipotle is considering adding chorizo to its menu across the U.S. in a bid to draw loyal customers to its restaurants more often.

Chipotle also reiterated it wouldn’t slow the pace of new restaurant openings, with as many as 235 slated for 2016. The company added 58 locations in the first quarter.

Five Months

Chipotle had previously announced that sales plunged in January, February and the first two weeks of March. Comparable-store sales fell almost 15 percent in the fourth quarter, and, including April, have now dropped for at least five straight months.

“Chipotle is looking at a 2017 recovery at the earliest, perhaps going into 2018,” said Asit Sharma, an analyst at The Motley Fool. “The turnaround is predicated on doing whatever it takes to get customers back in the store at least once, to restore their confidence level with the brand. So they need to stick with this strategy, however painful the near term is.”

Chipotle’s sales had started to recover last month before reports that workers at a Boston-area restaurant got sick with norovirus. That location was shuttered for cleaning and no customers got sick. Still, the negative headlines once again sent sales plunging.

Difficult Road

The crisis began in November, when the Centers for Disease Control and Prevention announced an investigation into an E. coli outbreak. That brought attention to previous foodborne illnesses linked to the chain.

Last month, Chipotle hired Jim Marsden, a former professor in Kansas State University’s Animal Science and Industry Department, as its executive director of food safety. The chain has vowed to make its restaurants the safest in the industry, while saying the new safety measures will increase its food costs by about 2 percentage points.

Chipotle may need another two years before recovering its previous level of sales per restaurant, and even then the chain will suffer from lower profitability, Nick Setyan, an analyst at Wedbush Securities, said in a recent note. Chipotle said its restaurant operating margin contracted to 6.8 percent in the first quarter, down from 27.5 percent.

Labor costs are another potential headwind. Nearly a quarter of Chipotle’s stores are in California and New York, where minimum-wage increases are moving forward in the next few years. Restaurants in those states were affected by the foodborne illnesses that sent Chipotle reeling, and the company said sales on the East and West Coasts have been slower to recover. Chipotle would have to raise prices to cover the higher wage costs, but that could be tough as the company struggles to reignite sales growth, said Stephen Anderson, an analyst at Maxim Group.

“We’re concerned that the company may not be able to pass along these increases,” Anderson said.

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