Without Queso, Chipotle's Results Would Have Been Worse

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Credit: Courtesy Chipotle

Chipotle Mexican Grill is counting on queso cravings and more marketing to keep some modest momentum going and is cutting down on store openings to sharpen its focus on its current business.

Following third-quarter results issued late Tuesday, Chipotle shares plunged 13.4 percent to $280.86 in trading Wednesday.

A hacking attack earlier this year, followed by hurricanes, added pressure to Chipotle's comeback efforts in the third quarter.

Chipotle had been calling for high-single-digit same-store sales growth in 2017. Now it expects those sales at longstanding restaurants to rise 6.5 percent this year, buoyed by price increases it will implement in the fourth quarter and September's national introduction of queso. That's a weaker prediction than the 7.2 percent analysts' estimate compiled by Consensus Metrix.

The results and the updated outlook signal how Chipotle's turnaround effort remains a choppy one. The Denver-based company has been reeling since an E. coli outbreak struck in 2015, crushing its sales, profit and stock price. The chain had started to recover in the past year, but then a norovirus incident in Virginia -- along with a video of mice at a Dallas location -- sparked a fresh round of negative headlines.

So far in the fourth quarter, same-store sales are up 2 percent to 3 percent, excluding the impact of deferred revenue seen a year ago due to a promotional campaign, the company said. Even when ignoring one-time setbacks, the third quarter was bleaker than analysts had projected. Same-store sales increased 1 percent, missing the 1.2 percent estimate from Consensus Metrix, and revenue rose 8.8 percent to $1.13 billion, short of their $1.14 billion projection.

Marketing and promotional expenses are expected to increase to about 4 percent of revenue in the fourth quarter as national TV advertising continues, up from 3.3 percent in the third quarter, said Mark Crumpacker, whose title is changing to chief marketing and strategy officer from chief marketing and development officer, as the company adds more executives to its ranks. Through the first nine months of 2017, marketing and promotional expenses were 3.4 percent of revenue, compared to 5.2 percent of revenue in the first nine months of 2016, when there were more promotions.

Chipotle said it's planning to open fewer locations this year as it works on rebounding. It now expects 2017 restaurant openings to be slightly below the low end of its prior forecast of 195 to 210. In 2018, it plans to open 130 to 150 new restaurants. Other plans include a "top to bottom redesign" of the beverages it serves, possibly adding more delivery providers, and accepting smaller catering orders.

Chief Executive Officer Steve Ells acknowledged that the latest results weren't what he hoped for, but he believes the company's revival is still on course. "We're embracing the things we need to reach our full potential," Ells said in an interview with Bloomberg on Tuesday. "From a structure standpoint -- and a feeling internally -- the teams are ready."

The third quarter was uneven. From mid-July through Sept. 11, just before it launched queso, same-store sales were down about 2.25 percent. Comparable sales from Sept. 12, with queso, through the end of that month rose 4 percent, excluding the impact of hurricanes.

While queso appears to be helping, "we wish it could have done what All Day Breakfast did for McDonald's," said RBC Capital Markets analyst David Palmer, who has a "sector perform" rating and $324.30 target price on Chipotle shares.

McDonald's same-store sales shot up after the October 2015 introduction of All Day Breakfast and its momentum has largely continued. On Tuesday, the Golden Arches delivered a better-than-expected 4.1 percent rise in third-quarter U.S. same-store sales.

Chipotle earned 69 cents per share last quarter, bogged down by expenses tied to the data-security breach and hurricanes Harvey and Irma. Analysts had estimated about $1.63 a share, according to data compiled by Bloomberg.

"There were a lot of unusual items in the quarter," Chief Financial Officer Jack Hartung said. In addition to the breach and the storms, higher avocado prices hurt results. These aren't recurring costs, he said.

-- with Bloomberg News

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