Chipotle's Got One for the Record Books, Not in a Good Way

Troubled Chain Posts First Quarterly Loss, But Expects Profit in Q2

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Chipotle said it still plans to open 220 to 235 locations this year.
Chipotle said it still plans to open 220 to 235 locations this year. Credit: Courtesy Chipotle

Chipotle Mexican Grill still has a long way to go before more people visit more often and pay full price for burritos, bowls and guacamole.

The chain posted its first ever quarterly loss as a public company on Tuesday. It said it may use a summer loyalty program and introduce a chicken and pork chorizo nationwide as two of its newest incentives to win back diners.

The company continues to suffer from perception issues -- though its customer survey scores are improving -- after a string of outbreaks including E.coli worried customers about the safety of eating at the fast casual chain.

"Never has it been more important for us to delight our customers on each and every visit," Steve Ells, founder, chairman and co-CEO, said during a conference call late Tuesday.

Chipotle spent $55 million on promotions and marketing in the first quarter, or about 6.6% of its $834.5 million in revenue -- a much higher percentage than it typically spends. That first-quarter spending included offers customers redeemed for more than 6 million free burritos or other entrees, plus more than 1 million free orders of chips with guacamole or salsa.

The chain is now paring back pure freebies but will still give people incentives to return. The offers this quarter include more "buy one item, get one free" deals. On May 3, it will give teachers who stop by after 3 p.m. a buy-one-get-one deal, similar to a promotion it did for youth soccer players on April 16. It is also waiting for more people to come in and redeem some of the direct mail buy-one-get-one offers it has already sent.

An ongoing national advertising campaign, which includes its largest media spending ever, is set to run through June. Chipotle will also use content-driven marketing programs, such as a short film or game, combined with "traffic driving" components, Chief Creative and Development Officer Mark Crumpacker said during the call.

The main groups Chipotle wants to win over are its most loyal customers, who used to visit at least 25 times per year, as well as those "new and lapsed" patrons that stop in only once a year.

It is considering introducing a limited-time frequency incentive for this summer. And it may add items to its limited menu to appeal to those customers. One of the first new items appears likely to be the chorizo, which was tested in Kansas City last year before the food safety issues surfaced.

Chipotle expects promotional and marketing spending to come in around 3% to 4% of sales over the next few quarters. At a percentage level, Chipotle is spending nearly double what it did on promos and marketing in the second and third quarters of 2015. However, when that spending occurred sales were growing at a double-digit clip. First-quarter revenue plunged 23.4%.

The first-quarter loss of 88 cents per share was not as severe as Chipotle or Wall Street had predicted. Still, the sales slide remains a big concern. Sales at longstanding locations, or same-store sales, plunged 29.7% during the quarter. Analysts anticipated a 28.4% drop according to Consensus Metrix. The falloff was much steeper than the 14.6% decline in last year's fourth quarter, when food issue stories began swirling.

Chipotle again placed blame for some of the first-quarter weakness on news reports focused on a Boston location's closure due to four ill employees, who followed its protocols and called out sick. Recovery in the northeast and the West Coast, where the illness issues surfaced in recent months, remains behind other parts of the country.

The company continues to refine its food preparation guidelines in the wake of last year's E.coli issues. For example, it decided to use a lettuce that was pre-shredded at central locations rather than cutting it at the restaurants. But that product did not get great marks, so now it will again have staff chop lettuce in the restaurants.

Chipotle said it still plans to open 220 to 235 locations this year, in line with the 229 openings it had in 2015. However, Co-CEO Monty Moran did point out that Chipotle is seeing weaker sales at recently opened locations when they are in new and developing markets for the chain. The company did not mention any plans for a "Better Burger" chain and was not asked about it by analysts on the call.

The chain did not provide a specific second-quarter forecast, saying it depends on sales levels. However, it does expect to post a profit, not another loss. The company plans to report those results July 21.

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