Just when you thought the worst might be over for Chipotle Mexican Grill, Inc. (NYSE:CMG) stock—it’s not.
Chipotle stock is down about five percent Wednesday after the burrito chain said that same-store sales fell 26.1% in February, more than the 22.0% drop analysts were expecting. Chipotle tried to put a positive spin on the news, saying that the decline was lower than the 36.4% drop in January and that so far in March, the sales drop has improved even more.
The company’s food safety crisis that hit its restaurants last October, leading to dozens falling ill, has also brought a first for CMG stock: it’s first-ever quarterly loss in earnings as a public company.
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.
Chipotle also said that it’s going to have to spend more on staff to accommodate customers who will be redeeming the free burrito offer as part of Chipotle’s efforts to win back customers. Oh, and there’s also a federal probe into its food safety practices that Chipotle will also have to spend money on.
Last month, Chipotle said it received a second subpoena from the U.S. Attorney’s office pertaining to “companywide food safety matters dating back to Jan. 1, 2013.” (Source: “Chipotle Sees First Quarterly Loss Amid Food-Safety Crisis,” Bloomberg, March 16, 2016.)
Here’s one last bit of bad news (as if there wasn’t enough already): even though Chipotle says sales have moderated in March, sales fell 27.3% in the second week of the month due to a single store in the Boston area getting hit by the norovirus. A few employees (but no customers) fell ill as a result of that outbreak. In the previous week, just when it seemed Chipotle had put its food safety crisis behind it, sales fell a modest 21.5%. (Source: “Chipotle Stock Gets Slammed As Sales Hit By New Norovirus Case,” Fortune, March 16, 2016.)
Should investors in CMG stock be worried?
Short-term, CMG stock may take a hit, but the news may not be all bad for Chipotle if this latest self-contained incident leaves no customers ill.
A survey released a couple of weeks ago showed that consumers are showing more willingness to eat at Chipotle, as the negative sentiment over the company’s food outbreaks begin to fade. (Source: “Willingness to eat at Chipotle increasing; sentiment bottomed in Jan – William Blair,” CNBC, March 3, 2016; http://www.cnbc.com/2016/03/03/willingness-to-eat-at-chipotle-increasing-sentiment-bottomed-in-jan–william-blair.html.)
“It appears that sentiment bottomed in January, with willingness to eat at Chipotle increasing after the company’s digital coupon for a free entrée spurred improved traffic in the latter half of February,” William Blair & Co. analyst Sharon Zackfia said in a research note. (Source: Ibid.)
Moderating sales in February and the first week of March have shown this.
In an effort to improve its image and food safety practices, Chipotle just named an executive director of food safety, Jim Marsden. Marsden is a former professor in Kansas State University’s Animal Science and Industry Department.
With the hiring, Chipotle intends to revamp its food safety protocols, but it will come at a bit of a price. Chipotle said it expects the new safety measures to increase its food costs by about two percent, but the company added that they can restore the lost margin once sales improve. (Source: “Chipotle Sees First Quarterly Loss Amid Food-Safety Crisis,” Bloomberg, March 16, 2016.)
Nevertheless this is a good step for the company to take to restore its image as being known for its high-quality food.
This quarter, Chipotle is also planning to spend $50.0 million on its promotional and marketing efforts, a number that is the most in its history. Chipotle is confident this tactic will work, as these efforts in the past were successful in driving substantial traffic to restaurants, the company said. (Source: “Chipotle Confident It Will Win Customers Back with New Marketing Blitz,” TheStreet.com, February 2, 2016; http://www.thestreet.com/story/13445073/1/chipotle-crushes-reduced-estimates-reveals-it-s-part-of-broader-investigation.html.)
The Bottom Line on CMG Stock
There will probably be some short-term pain for CMG stock. The recovery might take a while—it usually has for restaurants that have found themselves in a similar situation in the past—so investors must be patient with CMG stock.