Chipotle Can't Even Give The Stuff Away

Recovery will just take time.

Despite blanketing the country with coupons for free burritos, Chipotle said Tuesday its sales continued to tank over the past two months. Now it expects to post a $1-per-share loss in the first quarter, instead of the break-even quarter it initially forecast. What gives? 

Free Fall

Year-over-year sales at established Chipotle restaurants continue to fall

Source: Bloomberg, company filings

For one, it turns out you don't make a lot of money by giving away stuff for free. But it's also an indication that millions of dollars of marketing isn't a compelling enough reason to bring back restaurant-goers who may have only come for the free meal, or those who moved on to Chipotle competitors in the wake of its food borne-illness scandal. Recovering those diners is going to take time

The company's stock fell by about 3 percent in after-hours trading Tuesday, as Wall Street digested the worse-than-expected results. 

Shares in the company are down about 30 percent over the past six months. But at around $500 a pop, the stock is nowhere near the $275 price target of some of the most bearish investors. And the 33 analysts surveyed by Bloomberg still hold a $493 12-month price target, down from around $750 in March of last year.

Many of the Chipotle bulls argue that if investors wait for sales to fully return in order to jump back in, they will have already missed their opportunity to cash in on the stock appreciation. That argument holds true, as long as the company really does turn itself around and start growing again. The question is -- how long could it take? A year? Two? 10? 

Low Expectations

Analysts surveyed by Bloomberg aren't expecting much from Chipotle's stock

Source: Bloomberg

Chipotle's stock had started climbing slightly higher in February, after the U.S. Centers for Disease Control gave the company a clean bill of health. But it started to flat line as analysts fanned out across the country collecting store-level data and investors started figuring out that February and March sales results would not show the turnaround story bulls had wanted. Another store closing over health reasons last week didn't help matters

Meanwhile, the stock price took on an even more important role in Chipotle executives' incentives to clean up the company: Last week, the board said part of the compensation for co-CEOs Monty Moran and Steve Ells would be tied to its share price and that the stock would have to be higher than $700 for 30 consecutive days to trigger the new stock awards. The additional skin in the game could accelerate Chipotle's transformation. 

The company continued to take a defiant tone in its Tuesday sales report, telling investors it still expects its "margins and earnings potential will fully recover." That may be so, but the past two months have shown it's going to take more than just a handful of free burritos to do that. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Shelly Banjo in New York at

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