When a restaurant posts consecutive year-over-year declines in same-store sales, you know it’s in huge trouble. Well, such is the story of Chipotle Mexican Grill, Inc. (CMG) these days.
Those percentage declines were what the company reported in January. And to make things worse, Chipotle expects to report a loss for the first quarter.
The woes that have befallen Chipotle stock find its root in the events of E. coli and norovirus outbreaks from last year, driving customers away in droves from the once-beloved Mexican food chain.
This event brought about a 6.8% revenue decline for CMG in its fourth quarter — but there seems to be a glimpse of light at the end of the tunnel, with Chipotle filing a trademark application for the name “Better Burger” this month.
With this news (which is proof positive of the CMG investment thesis), it’s time to see whether this can break Chipotle stock free of its recent vitriol and into a new era of “Better Burgers.”
Chipotle Will Succeed in the Burger Business
Right off the bat, Chipotle has a bigger opportunity in the burger business than in Mexican food. According to research firm Technomic, U.S. burger chains that have no wait staffs recorded $76.9 billion in sales in 2014, compared to $19.7 billion in the Mexican food space. The growth opportunity is obvious.
Second, Americans are hungrier for beef, according to the Department of Agriculture. By implication, the burger market is sure to expand the $77 billion mark over the next few years.
And I believe that Chipotle stock will capture a respectable portion of that business, thanks to the way the company is set up.
According to Chipotle’s spokesman, the company’s business model can be applied across a variety of foods. In essence, CMG wants to bring its culture of fresh ingredients (albeit a bit tarnished now) to the burger business. Of course, you’re thinking, “but doesn’t the E. coli crisis dwarf its potential here?” Initially, but it’s the long-term performance that matters here.
The CDC declared Chipotle free from E. coli earlier this year, so what’s left is recovering from the damage. As for recovering, Chipotle isn’t taking any chances, bringing in Kansas State University meat-science professor James Marsden to keep its stores and image fresh.
It might take some time, but consumers will once again crave Chipotle, in whatever business it decides to dabble in.
Bottom Line on Chipotle Stock
If you read between the lines, it’s clear that the expansion into burgers won’t be the last. Chipotle clearly stated that that its model can be applied to a “variety of foods.”
While temporarily dented, Chipotle will eventually recover its “healthy” quick serve image. And as I stated earlier, this will position it for success in its new ventures.
Tough times are part of every business, just as they’re part of our human lives. Chipotle already has a strong and compelling business model, so it will most certainly overcome its current crisis.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
