Chipotle Earnings Preview: Will Q2 2017 Disappoint Investors?

Chipotle Mexican Grill (NYSE: CMG)  is likely to announce its Q2 2017 results on July 25, 2017, as it braces to come out of another reputational loss faced due to a norovirus incident at one of its locations. (Read Can Chipotle’s New Menu Prove Stronger Than Its New Virus). While this incident comes after the end of the second quarter, the company’s stock price declined by more than 5% between April and June 2017, and registered a further nearly 15% decline after June 2017 consequent to the reports about the new virus. Below is a summary of consensus estimates for Chipotle for Q2 2017:

Source: Yahoo Finance

The second quarter of 2016 is a softer comparison given that Chipotle was suffering from a significant loss in customers  during this quarter, due to the impact of the E. coli virus. Q2 2017 is expected to be significantly better than the same period last year. However, post the Q1 2017 earnings the company updated its  guidance on expenses indicating that it might spend higher on promotional initiatives this year. (Read Here’s Why Chipotle Mexican Grill’s Revised Guidance Does Not Impact  Our Price Estimate).  We will be watching Chipotle’s reported margins in this quarter to assess the impact of this change.

Industry Environment

As per data analyzed by BlackBox Intelligence, the restaurant industry has been “cautiously optimistic” in Q2 2017. While comp sales and traffic growth have remained negative throughout the quarter, June sales were best for the industry for both these metrics in the past six months.

Higher job and economic growth and moderating credit growth should help the restaurant industry going forward. Fine dining and upscale casual were the best performing restaurant segments in Q2 2017. Fast casual restaurants have been the weakest  performing segment and the quick service segment is also struggling to grow. Chipotle is struggling to grow traffic due to the reputation loss suffered by the company from the E. coli virus and could be impacted by this slow industry environment. Further, the following factors can impact Chipotle’s performance in Q2 2017:

1. Data Breach : Chipotle’s reputation was impacted by a security incident where malware was found at point of sale devices  at its stores. This incident is likely to impact its store traffic negatively as customer confidence can be adversely affected due to this incident. (Read Data Breach At Chipotle: A Lesson For Restaurant Companies)
2. Customer Perception : Surveys have suggested that customers consider Chipotle to be a fast food restaurant akin to McDonald’s as opposed to a fast casual dining place and this can impact the company’s revenues negatively. The company’s price increase has not met expectations and if customers consider it to be a quick service restaurant they might find its prices higher than peers, impacting the company’s growth negatively. (Read Here’s Why A Comparison With McDonald’s Is Bad For Chipotle Mexican Grill)
3. Menu Innovation : Chipotle has set up a new public “test kitchen” which is part of its marketing plan for Chipotle of the future. While these new menu items including the popular “queso” are still being experimented on, this can become a key revenue driver for the company in the long term. (Read Can Chipotle’s New Menu Prove Stronger Than Its New Virus).

In a challenging environment, we would be watching two key metrics in Chipotle’s Q2 2017. Its margins and promotion expenses and its same store sales growth to gauge the impact of its marketing efforts and loss of customer confidence due to the data breach incident.

For further details on the company See Our Complete Analysis For Chipotle Mexican Grill

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