For Chipotle Investors, This Quarter Is All About QuesoBy
Cheese dip added to menu few weeks before end of third quarter
Sales, stock under pressure after latest norovirus outbreak
Call it the queso quarter.
Chipotle Mexican Grill Inc., the burrito chain roiled in recent months by renewed food-safety concerns, is betting that the addition of the gooey cheese dip to the menu can help it regain its allure with customers.
Investors will be looking for signs of progress on Tuesday, when the chain reports third-quarter earnings. So far, Chipotle’s queso has been met with criticism on social media, with customers complaining that the texture is grainy. That reaction was one reason David Palmer, an analyst at RBC Capital, cut his price target on the stock 18 percent to $330. He also cited higher labor costs and rising avocado prices.
The social media backlash against queso implies that the product “weighed on Chipotle’s overall brand sentiment,” Palmer wrote in a note.
On Chipotle’s last earnings call in July, company executives mentioned queso about two dozen times, saying customers had been requesting the product for years and that it could help boost sales. Queso, a Tex-Mex favorite, is typically made with Velveeta, a processed cheese product, but Chipotle developed a recipe that meets its natural food standards. Queso is the centerpiece of the company’s largest-ever marketing campaign.
In response to the criticism on Twitter.com, Mark Crumpacker, the company’s chief marketing officer, urged employees to ignore the backlash, citing internal research that showed the product was a hit with customers.
Queso was added to the chain’s menu on Sept. 12, a little more than two weeks before the end of the third-quarter. Chipotle’s food safety crisis burst into view in 2015, crushing the chain’s sales, profit and stock price. The company had started to recover, before a July norovirus outbreak at a restaurant in Virginia send the shares spiraling to their lowest level level in more than four years.
Chipotle’s shares had slipped 14 percent this year through last week, finishing at $324.76.
Chipotle, whose largest shareholder is billionaire Bill Ackman, has posted two straight quarters of positive same-store sales, but that streak appears to be in jeopardy because of the fallout from the summer norovirus outbreak. In addition to cutting his price target, Palmer lowered his same-store sales estimate for the quarter and now expects a 1 percent decline.
“Everybody is looking at the sales and what the impact of the outbreak was,” said Michael Halen, an analyst at Bloomberg Intelligence.