CMG Stock: Analyst Says This Should Have Chipotle Shareholders Worried

CMG StockChipotle Mexican Grill, Inc. (NYSE:CMG) stock is down about 10% since last Tuesday after the company reported that same restaurant sales in February fell more than analysts had hoped. Actually, investors in CMG stock have been hoping for even the slightest bit of good news in Chipotle’s food safety crisis as a reason to stick with the stock. But it just seems to be one bad thing after another for Chipotle.

That has forced at least one analyst to give up on CMG stock. Stephen Anderson, an analyst at The Maxim Group, is downgrading Chipotle Mexican Grill from “Hold” to “Sell” and is dropping the price target from $450.00 to $350.00. At its current stock price, that’s about a 24% decline for CMG stock. (Source: “Chipotle Mexican Stock Seen Sliding to $350,” Barron’s, March 17, 2016.)

That’s already on top of a drop in CMG stock of about 36% since October, when the E. coli virus and norovirus hit several of its restaurants across the U.S., leaving dozens of customers ill.

Anderson said that he was expecting Chipotle to report same restaurant sales to decline 18% in February and 15% in the first two weeks of March. Chipotle came in well below those estimates, reporting declines of 26.1% and 24.4% in February and the first two weeks of March, respectively.

Anderson added that Chipotle’s earnings will remain limited well into 2017, as management will need to “buy” back sales over an extended period.

How does Chipotle buy back customers? By giving away free burritos, of course. In early February, Chipotle said it was planning to spend $50.0 million on its promotional and marketing efforts, a number that is the most in its history. (Source: “Chipotle Confident It Will Win Customers Back with New Marketing Blitz,” TheStreet.com, February 2, 2016.)

Anderson said that his traffic checks had begun to show a slow recovery during the free burrito giveaway from February 8 to February 24. However, once the promotion ended, and after the latest food outbreak two weeks ago in a Chipotle Boston-area restaurant, some of the traffic gains began to reverse.

How does Chipotle try to reverse the reversal? You guessed it—more free burritos. The company just announced that it is sending out 21 million direct mail coupons for free burritos in the next few weeks. During last month’s free burrito promotion, about 5.3 million people downloaded the mobile coupon, with about 2.5 million redeeming the offer. (Source: “Chipotle is giving away more free burritos,” Business Insider, March 16, 2016.)

With all the free burritos being given away in Chipotle’s latest announcement, marketing expenses are likely to be much higher than the $50.0 million management said it would initially spend in the first quarter. Guidance for the first quarter confirms this.

Chipotle said it expects a loss of $1.00 per share or more in the first quarter. The company had previously predicted that earnings for the quarter would break even, but higher-than-anticipated spending on marketing and food safety, including throwing out more food due to more rigorous testing, is weighing on profits.

Should investors in CMG stock be worried?

It looks like Chipotle’s recovery is going to take longer than expected. Short-term, CMG stock may take a hit, but the news may not be all bad for Chipotle if the latest outbreak in the Boston-area restaurant leaves no customers ill and is truly the last one.

Prior to the latest outbreak, a survey showed that consumers were showing more willingness to eat at Chipotle, as the negative sentiment over the company’s food outbreaks began to fade. (Source: “Willingness to eat at Chipotle increasing; sentiment bottomed in Jan – William Blair,” CNBC, March 3, 2016.)

Moderating sales in February and the first week of March showed this.

The Bottom Line on CMG Stock

Investors should proceed with caution with CMG stock, at least in the short term. On the other hand, Chipotle has been surrounded by nothing other than bad news, so even the smallest bit of good news at this point should push CMG stock back up.