Chipotle Spends $1 Billion on Stock Buybacksby
Share repurchases may limit cash for new restaurants, remodels
Cash dropped to lowest since 2010 after company bought stock
Chipotle Mexican Grill Inc. is stocking up -- on itself.
The burrito chain has spent more than $1 billion on share buybacks in the past year, part of efforts to cope with a food-safety crisis and a flagging stock price. But the move has raised questions about whether the money would be better spent somewhere else -- say, on new technology or remodeling restaurants -- especially since the shares remain down.
The cost of the repurchases is roughly twice the cash Chipotle’s restaurants generated in the same period, according to data compiled by Bloomberg. Chipotle’s ratio of stock repurchases to cash from operations in the past 12 months was the third-highest among U.S. restaurant companies.
While Wendy’s Co. and Domino’s Pizza Inc. had higher ratios, those brands are heavily franchised and generate less cash from operations. Chipotle, which has more than 2,000 locations, doesn’t franchise.
Amid the worst crisis in its history, Chipotle’s supersized buybacks may not be the best move, said John Gordon, principal at restaurant adviser Pacific Management Consulting Group. While the repurchases may signal management’s vote of confidence to investors, the cash could be spent elsewhere, he said.
“They did buybacks instead, and it’s somewhat surprising,” Gordon said. “We really didn’t see much uplift to the stock price. In fact, it fell. So what was the value of the buybacks really?”
Chipotle has declined 4.2 percent since the previous two quarters’ buybacks were announced beginning Feb. 2. The Standard & Poor’s 500 Index has gained 9.5 percent in that time.
Gordon suggests that the money could have gone toward adding or remodeling restaurants, improving technology or starting a loyalty program. But Chris Arnold, a Chipotle spokesman, says the buybacks aren’t crowding out spending elsewhere.
“We are absolutely not forgoing other investments by buying back our stock,” Arnold said. “This is not an either/or proposition. We are able to buy back stock and make other strategic investments.”
The company is still figuring out how to revive sales growth after E. coli and norovirus outbreaks sickened dozens across the U.S. beginning last year. Chipotle recently reported its first quarterly loss as a public company amid plunging revenue. Even as the chain tries to lure diners with free burritos, coupons and heavy advertising, April comparable-store sales tumbled 26 percent, excluding the benefit of an early Easter.
That sales plunge has caused some unrest among investors Chipotle, which is holding its annual shareholders meeting Wednesday in Denver. CtW Investment Group, which is affiliated with the union-backed group Change to Win, has called on the company to vote against directors Patrick Flynn and Darlene Friedman, both longtime members of nominating and corporate governance committee. Institutional Shareholder Services, which advises on proxy votes, also called for shareholders to oppose Flynn.
Historically, Chipotle hasn’t bought back much of its stock. In the first quarter, however, the burrito seller spent $583.8 million on its shares, about 25 times the amount it spent on them a year ago. It bought back $314 million in the prior quarter. Those purchases helped lower Chipotle’s cash and equivalents to $250.8 million as of March 31, near the lowest quarterly level since 2010.
“Our strong balance sheet is the result of our making thoughtful investments over the years in high-returning investments, while placing smaller bets, or making smaller investments in future growth opportunities, such as our growth seeds (ShopHouse, Pizzeria Locale and Chipotle in Europe),” Arnold said.
And because there are fewer shares on the market, buying stock may boost earnings by as much as 23 cents a share this year, according to a note from Maxim Group LLC analyst Stephen Anderson. In 2017, the buybacks may add about 94 cents to earnings per share.
Some investors are fans of the buyback strategy. Chipotle is smart to buy back stock at such a depressed price, said Jason Moser, an analyst at the Motley Fool who also owns shares of Chipotle. He predicts the company will recover as it sends out coupons and introduces new policies at its stores, which can be done quickly and consistently because the chain isn’t franchised.
“We expect to see the trends only get better,” Moser said. “And if that’s the case, then these share buybacks will prove to be very shrewd.”
Other S&P 500 Index companies have been increasingly bolstering earnings with buybacks, according to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices. In the first quarter, 30 percent of companies cut their number of shares outstanding by at least 4 percent, Silverblatt’s data show. Companies generally use buybacks to increase the relative stake of each investor.
More buybacks may be in store for Chipotle, which had $71.4 million left in its current authorization as of late April. Doing so, however, may limit its ability to improve older locations and put more energy-efficient equipment into restaurants, Anderson said.
“Initially, it might have been a good idea,” he said. “But I think they’re really hurting themselves if they want to keep up the level of investment not only in new stores, but in remodels and technology.”