Is Chipotle Finally On A Turnaround Path?

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CMG: Chipotle Mexican Grill logo
CMG
Chipotle Mexican Grill

The first quarter of 2017 has been encouraging for Chipotle Mexican Grill (NYSE: CMG) The company beat analyst expectations in both revenues and EPS and reported a nearly 17% increase in comparable sales. After struggling for several months after its food was contaminated with the E. coli virus, it appears that the company’s food safety and promotion measures are finally bearing fruit. Apart from focusing on higher food quality norms, Chipotle has also focused on improving its customer service in the past few months, through a better employee retention plan. According to the company’s management, before the E. coli crisis hit Chipotle, it was already struggling on the customer service front. The company’s CFO mentioned in a recent interview that the company’s staff was “distracted” and not serving the customer as per expectations. Chipotle has taken several measures to resolve this in the past few months and the results are visible in terms of a better guest experience.

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Increased Focus On Better Customer Service

In order to resolve the customer service issue, Chipotle has worked aggressively in the past few months on its employee-related initiative to improve the guest experience. The company revamped its Restaurateur program (which rewards its best managers) and refocused it on five understandable measures. By removing abstract measures and complexities around this program, the company has been able to achieve a better guest experience, as employees delivered better performance.  The company has eliminated complex tasks and freed up more time for employee training, hiring, and customer service. Decreased employee turnover has been the most significant benefit of this initiative, leading to better customer service and labor efficiencies.

Based on Chipotle’s revenue and comparable sales numbers (for Q1 2017), it appears that the company is witnessing an increase in traffic and customers are returning back to its restaurants. However, since the results of Q1 2017 are being compared with a softer prior period (when the company was reeling under the E. coli crisis) we are cautious about this improvement. Chipotle appears to have simplified and improved its restaurant processes and the food safety measures appear to have instilled confidence among customers, however it still needs to work on a competitive edge for sustained growth. Several quick service restaurants are working on menu innovation and healthier menu options, making the environment tougher for Chipotle. While the company is still working on getting its affairs in order it needs to quickly move toward the next stage which is innovation in menu and digital initiatives.

Chipotle does appear to be on a turnaround path with revenues and comparable sales growing. The benefits of higher sales are also visible in its bottom line with lower food and beverage costs (as a percentage of revenue). However, whether the company will be able to withstand competitive pressures, once it is back on its feet, remains to be seen. We have not updated our EPS estimate for Chipotle and will wait for its performance in the next three months to change our estimates.

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