Is This The New Normal For Chipotle?

Who would have thought the outbreak of E.coli linked to the America’s fastest growing fast food chain, Chipotle, would have turned into never-ending, uphill battle for the company. There is nothing that the company hasn’t done to revamp its image and popularize itself again among its customers. From giving free food, to educational videos, to hiring food quality experts, to following stringent practices for hygiene, the burrito chain has pulled all stop-gaps. However, as is obvious from the latest quarterly results, nothing is making a dent and it remains hard as ever for the company to see its sales rebound to levels seen before the E.coli incidents. This causes us, like many others in the market, to wonder if this is the “new normal” for the Chipotle.

In the following article, we talk about some of the recent trends that have emerged at the chain and what could they potentially mean for Chipotle.

Promotional Activities

The food give-aways and promotions, as discussed in an earlier article, have increased the company’s operating costs multi-fold, while cutting the margins, which were once the highest in the industry, by half. Further, the increased expenditure hasn’t translated into any rebounds for the company. It can be argued that by changing consumers behavior, the give-aways have potentially damaged CMG’s pricing power permanently.

Diversification

Unfortunately, the company’s attempt at diversification isn’t working too well either. The opening of its first burger joint, called Tasty Made, has received mixed reviews at best, not mentioning the barbaric competition in the space. It is very likely that the investment will turn out to be a strategic failure like “ShopHouse”, which the company’s management recently decided to shut down. The decision to discontinue ShopHouse is being viewed negatively by many as it pares the possible growth potential of Chipotle and questions the capability of the management to grow a brand. Similarly, its investment in Pizzeria Locale hasn’t seen any wonders. The number of stores have stagnated, as the pizza space is exploding with new players and is tough to break into.

Digital Ordering

Next we turn to the recently announced  investments in digital ordering, which are inteded to reach a wider customer base. During its recent earnings call, Chipotle announced the introduction of a new mobile-optimized ordering site, that offers an alternative to iOS and Android ordering apps. It is also testing a tablet-based ordering option. However, the argument that this will help drive sales is shaky. Digital platforms, as seen at Starbucks and Dunkin’, exist to help the management run their stores more efficiently, helping customers skip lines and store operators to cater to more people. But, at Chipotle, the demand is what is lacking, as is evident from the declining comps. According to Trefis, the focus is wrongly placed.

Unrealistic Guidance

The guidance of low single digit negative comps in the last quarter of 2016, which steadily turn positive in 2017, is not good news despite how it sounds. The positive tone to the guidance underlies the fact that the company has completed one year since the E.coli first hit the company, causing an overlap of the comparable period. Even a slight improvement, henceforth, would blow up and seem significant. Therefore, even with a marginal improvement in comps, traffic or sales it may be able to showcase growth. However, the guidance of $10 earnings per share by next year is quite unbelievable, given the present earnings are less than $4 per share.

The Ackman Affect

A few months earlier, Chipotle’s stock buoyed upward due to the news of Bill Ackman purchase of a 10% stake in the company. However, until recently, not much had been heard in terms of strategy to be used by the billionaire to execute a turnaround. In a sign that change may be knocking on Chipotle’s door in the form of change in leadership and the board, Bill Ackman and CMG have signed a confidential agreement to engage in discussions. What remains to be seen is if a change in board will result in an improvement in the company’s fundamentals.

Have more questions about Chipotle Mexican Grill (NYSE: CMG)? See the links below:

• Chipotle’s Q3’16 Performance Fails To Impress; Tough Road Ahead
• Chipotle Mexican Grill Q3 FY’16 Earnings Preview: Comps Will Remain Under Pressure
• Will Chipotle’s Food Safety Initiatives Lead To A Turnaround In Comps?
• Health Revolution: Healthy For Some, Unhealthy For Others
• Will Chipotle’s Latest Marketing Gimmicks Pay-Off?
• What Impact Can The Continued Fall In Spend Per Visit Have On Chipotle’s Stock Price In The Next Year?
• How Has Negative PR Affected Chipotle’s Operating Efficiency?
• What Can Produce Over 10% Upside To Chipotle’s Stock In The Next Year?
• How Is Chipotle Dealing With The Aftermath Of The E.coli Outbreak?
• Down, But Not Out: Chipotle Returns To Profitability In Q2’16, Despite Weakness In Top Line
• Chipotle Mexican Grill Q2 FY’16 Earnings Preview: Recovery In Top-line Likely To Be Weak
• Chipotle Mexican Grill Struggles in Q1 FY’16 As Last Year’s E.coli Controversy Impacts Comparable Sales
• Chipotle Mexican Grill FY 2015 Earnings Review: E.Coli Scandal Hinders Top-line Growth
• What’s Chipotle Mexican Grill’s Fundamental Value Based On Expected 2016 Results?
• What Is Chipotle Mexican Grill’s Revenue and EBITDA Bridge?
• How Has Chipotle Mexican Grill’s Operating Metrics Changed Over 2011-2015?
• Where Will Chipotle Mexican Grill’s Revenue and EBITDA Growth Come From Over The Next Three Years?
• Chipotle Mexican Grill Q1 FY’16 Earnings Preview: E.coli Scandal Might Still Impact Top-line Growth

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