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Chipotle's (CMG) Troubles Continue: Should Investors Worry?
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Shares of Chipotle Mexican Grill, Inc. (CMG - Free Report) declined about 7.6% in yesterday’s trading session after Founder and Co-Chief Executive Officer, Steve Ells, raised some concerns over the company.
Among the top issues pointed out by the Co-CEO in a conference yesterday, is the possibility that the company might not be able to reach its previously announced guidance. With the third quarter 2016 results, management announced that it expects fourth quarter same-store sales to decline in low single-digit rates while 2017 same-store sales are expected to rise in high single digits. However, Steve Ells declared that he was “nervous” about achieving this target.
What’s Ailing Chipotle?
Comps have declined in each of the trailing four quarters, with an average decline of over 23%. Comparing with an already weak fourth-quarter 2015, the company expects comps to be down in low single-digits.
The reason for declining comps has been the negative publicity associated with the E. coli and norovirus outbreaks in several states, which surfaced toward the end of 2015. As a safety measure, the fast casual chain was then forced to close several outlets. Although these were reopened later with fresh ingredients and extensive cleaning and sanitizing activities, the incidents have given a severe blow to Chipotle’s sales. In fact, the company’s earnings and revenues have been under constant pressure since then.
Consequently, shares of Chipotle have been persistently underperforming the Zacks categorized Retail-Food & Restaurants industry. The stock has recorded a massive dip of 23.7% year to date, while the broader industry grew 0.5% in the same time frame. Although the restaurant industry itself is struggling through its worst year since the end of recession, Chipotle has performed even worse due to the virus outbreak scare.
Notably, currently the company is trading at a trailing 12 months P/E metric of 124.19 and a forward P/E multiple of 205.66, manifolds higher than other similar companies like Brinker International, Inc. (EAT - Free Report) , Darden Restaurants, Inc. (DRI - Free Report) and YUM! Brands, Inc. (YUM - Free Report) that have multiples ranging between 15–25x. This indicates that Chipotle has already been trading at a huge premium relative to its true valuation.
Furthermore, Chipotle’s market share, particularly in the Mexican cuisine category, is unlikely to increase any time soon as the company has already reached 60% saturation in the U.S. last year and is currently facing increased competition. Thus, it is not likely that the brand will recover and return to its peak levels of 2014, as smoothly and quickly as it would have expected.
In fact, the Co-CEO also stated that he himself is not satisfied with the rate of recovery of Chipotle and the quality of the guests’ restaurant experience. He went on to say that most of restaurants would be graded poorly primarily due to untidy dining rooms, dirty soda filling stations and slow-moving lines.
Thus, Chipotle seems to be trapped in a maze with no clear way out. Prior to the incidents last year, the brand prided itself on speed, safety and good vibe. However, the need to shift focus to increased food safety measures has reduced speed of service in an already declining customer trust situation.
The only light at the end of this dark tunnel seems to be the announcement of changes in the company’s Board. As announced by Ells, a new slate of board members could be expected to increase investor confidence.
Our Take
Though Chipotle is undertaking various marketing and promotional efforts to boost sales, we believe it is going to take the company a long time to mark a turnaround. Further, earnings estimates have also been going down. Current quarter and current-year estimates have gone down by nearly 51% and 54%, respectively, over the last two months. Thus, though they could be helpful in the long-run, the company’s desperate efforts to save the brand are failing currently, making it a high-risk long-term investment.
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Chipotle's (CMG) Troubles Continue: Should Investors Worry?
Shares of Chipotle Mexican Grill, Inc. (CMG - Free Report) declined about 7.6% in yesterday’s trading session after Founder and Co-Chief Executive Officer, Steve Ells, raised some concerns over the company.
Among the top issues pointed out by the Co-CEO in a conference yesterday, is the possibility that the company might not be able to reach its previously announced guidance. With the third quarter 2016 results, management announced that it expects fourth quarter same-store sales to decline in low single-digit rates while 2017 same-store sales are expected to rise in high single digits. However, Steve Ells declared that he was “nervous” about achieving this target.
What’s Ailing Chipotle?
Comps have declined in each of the trailing four quarters, with an average decline of over 23%. Comparing with an already weak fourth-quarter 2015, the company expects comps to be down in low single-digits.
The reason for declining comps has been the negative publicity associated with the E. coli and norovirus outbreaks in several states, which surfaced toward the end of 2015. As a safety measure, the fast casual chain was then forced to close several outlets. Although these were reopened later with fresh ingredients and extensive cleaning and sanitizing activities, the incidents have given a severe blow to Chipotle’s sales. In fact, the company’s earnings and revenues have been under constant pressure since then.
Consequently, shares of Chipotle have been persistently underperforming the Zacks categorized Retail-Food & Restaurants industry. The stock has recorded a massive dip of 23.7% year to date, while the broader industry grew 0.5% in the same time frame. Although the restaurant industry itself is struggling through its worst year since the end of recession, Chipotle has performed even worse due to the virus outbreak scare.
Notably, currently the company is trading at a trailing 12 months P/E metric of 124.19 and a forward P/E multiple of 205.66, manifolds higher than other similar companies like Brinker International, Inc. (EAT - Free Report) , Darden Restaurants, Inc. (DRI - Free Report) and YUM! Brands, Inc. (YUM - Free Report) that have multiples ranging between 15–25x. This indicates that Chipotle has already been trading at a huge premium relative to its true valuation.
Furthermore, Chipotle’s market share, particularly in the Mexican cuisine category, is unlikely to increase any time soon as the company has already reached 60% saturation in the U.S. last year and is currently facing increased competition. Thus, it is not likely that the brand will recover and return to its peak levels of 2014, as smoothly and quickly as it would have expected.
In fact, the Co-CEO also stated that he himself is not satisfied with the rate of recovery of Chipotle and the quality of the guests’ restaurant experience. He went on to say that most of restaurants would be graded poorly primarily due to untidy dining rooms, dirty soda filling stations and slow-moving lines.
Thus, Chipotle seems to be trapped in a maze with no clear way out. Prior to the incidents last year, the brand prided itself on speed, safety and good vibe. However, the need to shift focus to increased food safety measures has reduced speed of service in an already declining customer trust situation.
The only light at the end of this dark tunnel seems to be the announcement of changes in the company’s Board. As announced by Ells, a new slate of board members could be expected to increase investor confidence.
Our Take
Though Chipotle is undertaking various marketing and promotional efforts to boost sales, we believe it is going to take the company a long time to mark a turnaround. Further, earnings estimates have also been going down. Current quarter and current-year estimates have gone down by nearly 51% and 54%, respectively, over the last two months. Thus, though they could be helpful in the long-run, the company’s desperate efforts to save the brand are failing currently, making it a high-risk long-term investment.
Chipotle currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>