Chipotle comp sales plummet a worse-than-expected 23.6% in Q2
Chipotle (CMG) reported disappointing quarterly results on Thursday after the bell.
Second quarter earnings per share came in at $0.87, below estimates for $0.90. Revenue of $998 million also missed expectations for $1.05 billion.
The all-important comparable store sales (which looks at the sales of Chipotle locations open at least a year) fell 23.6%, which was worse than the 20% expected by analysts.
Sales figures continue to struggle in the wake of the restaurant chain’s E. coli crisis last year. Bears continue to suggest last year’s food-safety crisis may have done permanent damage to Chipotle.
But co-CEO Steve Ells said that trends have improved since the launch of the company’s rewards program—”Chiptopia”—on July 1. Customers participating in the program earn a free entree with their fourth, eighth and 11th visits in a given month.
“Our most recent marketing efforts, led by our Chiptopia frequency program, are off to a nice start in the third quarter, as customers are embracing the program and nearly 30% of all transactions are engaged in Chiptopia,” he said in the company’s press release.
Ells added that these efforts have contributed to a stronger July trends, an important focus for investors.
“While it has only been a few weeks since Chiptopia launched, we are pleased to see that July sales comp trends have already improved by 200 to 300 basis points and transaction comp trends have improved by an even greater amount,” Ells added.
Co-CEO Monty Moran emphasized the company’s focus on winning back customers.
“The best thing that we can do for our business is to earn customers’ trust and loyalty by consistently providing a terrific restaurant experience with safe, delicious food and excellent service,” he said in the company’s press release. “We will do that by continuing to develop great leaders who can build restaurant teams of empowered top performers that can successfully deliver on this goal.”
Problems continue to plague the fast-casual Mexican chain
It’s been a rough year for Chipotle investors. The stock is down over 40% compared with a slight rise in the S&P 500 (^GSPC).
While traffic does continue to improve, the company has relied on costly promotions to draw in customers who may be wary of eating there in the wake of last year’s Chipotle-linked E. coli outbreaks.
“We regard the current Chipotle promotion, as well as the free burrito and buy-one-get-one promotions earlier in 2016, as a more permanent part of CMG’s marketing strategy,” said Maxim’s Stephen Anderson.
Furthermore, costs have been higher as a result of increased food safety compliance. Management has said that increased costs for more rigorous food-safety protocols would deduct at least 150 basis points on an annualized basis.
“We see this as a permanent ongoing cost that will likely prevent CMG from repeating its cycle-high 17.3% margin,” Anderson said.
Meanwhile, the company does have higher exposure than peers to $15 per-hour wage mandates, Anderson added. It will be subject to accelerated wage increases in at least 25% of the company’s US restaurants in the next three to five years. Menu price increases to offset costs could put a damper on traffic, Anderson said.
While some of the most extreme food safety risks remain in the rearview mirror, Anderson said that potential legal risks remain.
Morgan Stanley analyst John Glass downgraded the stock last week.
“A full sales recovery to prior peak volumes could take years in our view, as evidenced by the fact that, according to our survey, approximately 25% of Chipotle customers have either stopped going or reduced frequency, even six months after the last food safety incident,” he wrote.
In fact, the proportion of past Chipotle consumers who stated they would not return to the restaurant for at least a year in January has stayed roughly the same in the firm’s most recent survey.
One potential longer-lasting upside catalyst in the coming quarters is the rollout of chorizo, a spicy chicken and pork sausage blend. Chipotle management plans to introduce chorizo nationwide in the fourth quarter but already has incorporated it as a permanent menu in some markets, including Manhattan, San Diego, Sacramento and Columbus.
“In our channel checks last week, we saw a more profound traffic lift in Manhattan than in control (i.e. non-chorizo) markets,” according to Maxim analyst Stephen Anderson. “Based on the performance of sofritas (tofu substitute), as well as our early checks on the chorizo pre-launch, we expect a lift to traffic.”
The bottom line: While other chains — like Yum’s (YUM) Taco Bell and Jack in the Box (JACK) — have recovered from disease outbreaks within a year, Chipotle’s recovery has gone much more slowly, so far. The company has continued to reiterate its plans to open 220 to 235 restaurants in 2016.
Nicole Sinclair is markets correspondent for Yahoo Finance.
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