Chipotle Results Miss Analysts’ Estimates as Crisis Drags On

Will Chipotle's Comeback Plan Work?
  • Ailing burrito chain does see some improvement in July
  • Company rolled out Chiptopia loyalty program this month

Chipotle Mexican Grill Inc. posted second-quarter profit and sales that missed analysts’ estimates, a sign the burrito chain is still reeling from a food-safety crisis that drove away customers and tarnished its reputation.

Net income in the quarter was 87 cents a share, the Denver-based company said in a statement Thursday. Analysts had projected 91 cents on average, according to data compiled by Bloomberg. Same-store sales fell 23.6 percent, the third straight quarter of declines. Analysts had estimated a 20.6 percent decrease, according to Consensus Metrix.

Chipotle has struggled to regain its footing in recent months following a series of foodborne-illness outbreaks. The restaurant chain has ramped up its marketing, launched a loyalty program, and used coupons and promotions to cope with the crisis, but it’s been a slow recovery. Chipotle officials have said that the company can eventually regain its once-enviable sales and profit margins after restaurant traffic rebounds.

“Our entire company is focused on restoring customer trust and re-establishing customer frequency,” co-Chief Executive Officer Steve Ells said in the statement.

The stock fell as much as 5.8 percent to $394 in late trading after the results were released. It was already down 13 percent this year through Thursday’s close.

Chiptopia Program

Ells said sales have begun to get better this month after the debut of the Chiptopia loyalty program, which attracted 3.6 million participants. Since the company started Chiptopia on July 1, same-store sales have improved by 2 to 3 percentage points, he said. The size of transactions has gotten a boost as well, Ells said.

Almost 30 percent of customer orders are now part of the Chiptopia program, Ells said. The loyalty effort, which lasts three months, provides free food to customers if they make multiple visits to Chipotle within a given month. The company also has added chorizo to its menu in select markets in a bid to boost restaurant traffic. Most loyal customers have come back, Chipotle says, but they don’t eat there as often as the company would like.

“There’s no quick solution to improving our sales and bringing our customers’ trust back,” Ells said on a conference call to discuss the earnings.

Marketing Executive

After months of negative headlines tied to sick customers, Chipotle got more bad news in recent weeks when one of its top executives was indicted for allegedly purchasing cocaine from a drug ring in New York. Mark Crumpacker, who was overseeing the advertising push meant to spur the chain’s recovery, was placed on leave by the company. He had run the chain’s marketing since 2009.

“We were surprised to learn of these personal issues,” Ells said on Thursday. Crumpacker’s duties have been divvied up among other executives.

Chipotle’s food-safety scandal burst into public view in November, when the Centers for Disease Control and Prevention said it was investigating an E. coli outbreak tied to the chain. That brought attention to previous foodborne illnesses among Chipotle customers. The situation worsened when a norovirus outbreak stuck a location outside Boston College in December, battering the chain’s results and stock price.

Third Straight

Same-store sales at the chain, once a darling of the restaurant industry, have dropped for three straight quarters. The 23.6 percent decrease in the second quarter follows a 29.7 plunge in the first three months of 2016. Chipotle’s difficult road to recovery was on display recently when a tweet about a sick customer in New York sent its shares down. The company said it received no reports of illnesses.

Chipotle reiterated on Thursday that it wouldn’t slow the pace of new restaurant openings, with as many as 235 slated for 2016.

Chipotle shares hit all-time high of $757.77 last August, but finished the year down 30 percent after getting walloped in the final two months of 2015 by the food-safety news.

To help burnish its image, Chipotle hired Jim Marsden, a former professor in Kansas State University’s Animal Science and Industry Department, as its executive director of food safety in March. The chain also has revamped its protocols and vowed to make its restaurants the safest in the industry. Chipotle has said that the new safety measures will increase its food costs by about 2 percentage points.

Labor costs are another potential headwind for Chipotle. Nearly a quarter of its locations are in California and New York, where minimum-wage increases are moving forward in the next few years.

These are also the regions -- the Northeast and the West Coast -- seeing the slowest recovery in same-store sales, Chipotle executives said on the call.

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