This post is part of the On the Margin blog.
Late Monday, Chipotle Mexican Grill Inc. issued a profit warning, suggesting that marketing costs would be 20 to 30 basis points higher than it initially expected in the second quarter. The fast-casual operator also reiterated other guidance, including one stating that full-year same-store sales would increase in the “high single digits.”
On the surface, the news was hardly Earth-shattering. But on Tuesday, investors reacted harshly, sending the company's stock down more than 7 percent.
Investors had been increasingly betting on a Chipotle recovery. At one point in May, the company's stock was up nearly 33 percent, particularly after the chain’s same-store sales increased an unexpectedly high 17.8 percent in the first three months of the year.
But Chipotle's stock has been declining ever since, and is now off by more than 14 percent since hitting the May high.
To be sure, the stock is still up more than 13 percent on the year, but investors are clearly getting cold feet about the pace of Chipotle’s recovery.
Chipotle’s profit warning led many analysts to reduce the company’s earnings forecasts modestly, which is one reason for Tuesday’s decline.
But Chipotle trades on its same-store sales, not on earnings, because investors are looking to see whether the company can regain the high-profit model that once made it the envy of the restaurant industry.
The model depends on high unit volumes lost when consumers abandoned the chain in 2016, following a series of foodborne illness outbreaks. Unit volumes have fallen from a high of more than $2.4 million to just over $1.8 million, which is still relatively high for a fast-casual chain, but below the likes of Culver’s and Steak ‘n Shake.
And a reiteration of the company’s “high single digits” same-store sales projection for the full year actually suggests a sales slowdown as the year progresses.
Simple math tells you that “high single digits” for the full year assumes future same-store sales that are considerably lower than the 17.3 percent pace set in the first quarter.
Instinet analyst Mark Kalinowski wrote in a note that he expects same-store sales to increase 10 percent in the second quarter, but that same-store sales will slow down in the second half of the year, including a forecasted increase of just 3 percent in the fourth quarter. And that's considering Chipotle's first national television ad campaign.
All that said, Chipotle’s same-store sales recovery is going to be slow. Jack in the Box took more than three years to recover lost sales following an E. coli outbreak in the early 1990s, and customer reaction to Chipotle’s incident was worse.
More to the point, Chipotle is operating in a far more difficult environment than previously existed. The industry is oversaturated and loaded with non-restaurant competitors that give consumers plenty of options. Chipotle also lost some of its reputation with the food safety incident, and that can be difficult to recover from.
Meanwhile, Chipotle lacks some of the easy marketing tools that quick-service chains could deploy to recover sales, such as limited-time offers or new product news.
Chipotle’s warning simply confirms its slow recovery. It doesn’t mean the company can’t recover the lost sales — it will just take a while.
Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.
Contact Jonathan Maze at [email protected]
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