Chipotle's chances of a making comeback are fading (CMG)
- 2017 was supposed to be a comeback year for Chipotle, but a less-than-exciting queso rollout has investors worried.
Those hoping for a quick comeback for Chipotle Mexican Grill should get comfortable. It's going to be a long ride. The fast-casual chain reported its third-quarter results on Tuesday, coming up well short of expectations. The only thing more unsettling than Chipotle's numbers is the grainy cheese sludge it's trying to pass off as queso.
This should have been a slam dunk
Chipotle managed to produce comparable sales growth of just 1% during the third quarter. Total revenue grew by 8.8% year over year, but that was almost entirely due to revenue from new stores. A 1% increase doesn't sound that bad on the surface, and it's certainly better than a decline. But that middling growth is off a severely depressed base.
During the third quarter of 2016, Chipotle's comparable sales tumbled 21.9%. Comparable transactions fell by a lesser 15.9%, with the discrepancy due, in part, to some aggressive promotional activity aimed at winning back customers after the disastrous food safety crisis of 2015.
That 1% increase looks pretty awful when you zoom out. There were some one-time issues that negatively affected sales, including the impact from Hurricanes Harvey and Irma. Comparable sales likely would have been a bit higher absent the hurricanes. But even so, it's clear that Chipotle is having trouble regaining the trust of its customers.
Two incidents at Chipotle restaurants earlier this year certainly didn't help. In July, a Chipotle location in Virginia had to shut down after a norovirus outbreak. It was isolated to a single store, but the much broader outbreaks of 2015 hadn't been forgotten. What would have been a non-issue turned into a big deal from a public-relations perspective.
Around the same time, a customer at a Chipotle location in Dallas recorded a video of rodents in the dining area. Again, this was an isolated incident, but it fed into the narrative that Chipotle still doesn't have a handle on food safety.
The nationwide launch of Chipotle's queso in September had the potential to boost the company's numbers. Chipotle even ran commercials centered on the new side item, the biggest television advertising campaign in its history. Chipotle claimed during the conference call that queso is driving sales so far in the fourth quarter. But the consensus opinion, at least on social media, has been overwhelmingly negative.
The stock is way too expensive
There was some good news in Chipotle's third-quarter report. Earnings per share more than doubled, to $0.69, even after charges related to the hurricanes and a data-security incident. And restaurant-level operating margin jumped 2 percentage points year over year, to 16.1%.
But given the top-line performance, it's starting to look like Chipotle's glory days of industry-leading margins and robust growth are officially over and not coming back. If that's the case, the stock is clearly overpriced, even after the tumble it took following the third-quarter report. With analysts expecting earnings per share of $7.34 this year, Chipotle trades for a whopping 37 times earnings. That valuation doesn't really make any sense given the company's struggles.
2017 was supposed to be a comeback year for Chipotle following the deep sales slump of 2016. Instead, the stock is carving out new multi-year lows as the company's turnaround hits a wall. Chipotle certainly isn't doomed -- it's still a profitable chain that does more than $4 billion of sales annually. But the bull case for the stock is evaporating.
Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
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