More Gains for CMG Stock?
Chipotle Mexican Grill, Inc. (NYSE:CMG) continues to trade between $445.00 and $465.00 per share. CMG stock took a hit in March, when the company announced that same-store sales dropped more than analysts had predicted. Clearly, the cases of E. coli and norovirus that ruined the company’s reputation—justly or not—have left CMG shareholders desperate for good news.
As Chipotle prepares to report its first-quarter 2016 earnings on April 26, Chipotle stock has lost almost a third of its value. The current down-pressure on the stock simply reflects the negative momentum from the series of problems that plagued the company in the last months of 2015. Food health concerns have forced same-store sales growth to remain flat and discouraged the opening of new locations, at least for now.
Yet, the good news is already there. Paradoxically, the good news is that Chipotle expects a terrible quarter. Yes, this is good news. Chipotle has already disclosed the main issues and earnings per share losses are going to be significant, meaning the company is not hiding the facts and shareholders are prepared for disappointment—meaning there will be no shocks.
Chipotle’s food safety issues have weighed heavily on its financials—that much we’ve established. With Chipotle having warned that it expects to announce its first quarterly loss since going public next week, with same-store sales having fallen 26% in February and having stayed down in March, the company is ensuring expectations remain in check. (Source: “Chipotle Is Warning Investors About Seriously Grim News,” Time, March 16, 2016.)
Of course, the efforts to win back customers through generous promotions because of the outbreak can be added to these losses. The company’s efforts to get people back to its restaurants through generous promotions were not cheap. As well, to encourage customers to return to the restaurant, Chipotle cut $50.00 from the cost of catering during the Super Bowl and offered its trademark guacamole and chips for free to customers who played a video game. (Source: “Chipotle spends big on free burritos to win back customers,” CNN Money, April 14, 2016.)
Not since the early 1990s and the infamous related cases involving Jack in the Box restaurants has E. coli affected a company as much as it has Chipotle over the past few months. Therefore, many eyes and ears are anxious about the Chipotle’s Q1 earnings, to be released next week. Some suggest CMG stock could drop as low as $350.00 following the company’s earnings report. (Source: “Chipotle Mexican Stock Seen Sliding to $350,” Barron’s, March 17, 2016.)
However, if Chipotle can escape the E. coli limelight, its brand and shares could start to grow again. In fact, investors could consider Chipotle’s current price as a cheap gateway to one of the best hospitality stocks, especially considering the company’s potential for continued growth in the United States and Europe.
Sure, Chipotle’s E. coli outbreak was a PR disaster. Thankfully, it didn’t cause any deaths. As far as E. coli outbreaks in restaurants go, it was not as bad as Jack in the Box’s outbreak in 1993. Four kids died after consuming E. coli-contaminated food from its restaurants. (Source: “Do Meat and Poultry Handling Labels Really Convey Safety?” Food Quality and Safety, March 31, 2014.)
Chipotle will continue growing because its model is appealing. The chain offers healthier food than its fast food counterparts—and organic food at that. It’s the kind of food that has seen growing demand in the United States and abroad in recent years.
To stimulate growth, Chipotle is also rumored to be reaching outside of its Mexican food menu to offer a high-quality North American staple: a better fast food burger. Chipotle has registered a trademark for Better Burger. It is unclear how exactly this will benefit the brand, but at the very least, it will be an additional source of revenue marketed under the image of healthier fast food—and a brand that hasn’t been marred by E. coli outbreak headlines. (Source: “Chipotle might be trying to enter the most crowded industry,” Business Insider, April 3, 2016.)
Overall, Chipotle stock has already absorbed a great deal of the problems that emerged in the last part of 2015. As well, the company has given ample warnings that its forthcoming quarterly results will be the worst to date. Chipotle’s growth potential remains intact and CMG stock is attractive at its current price, considering it’s down a third from its highs.