Chipotle Mexican Grill, Inc. (NYSE:CMG) suffered through a difficult year after its booming burrito chains were hit by widespread outbreaks of E.coli, salmonella and norovirus. Chipotle stock is down nearly 50% from a year ago as investors wait to see if the chain is resilient enough to shake off the fallout from the food borne illness scares.
There’s no doubt that CMG is doing everything in its power to return to its former glory, but it’s too soon to tell whether the Mexican restaurant’s efforts are enough.
One of the reasons that Chipotle was such a good investment before the E.coli outbreaks was the firm’s financial strength. With no debt and a healthy amount of cash, Chipotle stock looked like a very promising bet.
However, since that time, the firm has had to up its marketing game in order to help erase the stigma that the food safety scares left behind.
Although CMG still holds no long-term debt, its spare cash dwindled to $190 million by the end of the second quarter. That’s a huge drop from the $588 million CMG was holding just a year earlier.
What Can Tasty Made Do for CMG?
Still, Chipotle stock saw a brief lift after the company announced plans to open up a burger chain this coming autumn. The burger joint, Tasty Made, will open its first location in Lancaster, Ohio, but there has already been some chatter about whether the new venture will be successful.
Tasty Made will follow Chipotle’s recipe for success by limiting menu items and focusing only on a few key offerings. While this has proven successful for Chipotle’s Mexican restaurants, there was a much wider gap in the market for Mexican-style fast food when CMG arrived on the scene. In the burger industry, things are a bit more competitive and it will be more difficult for Tasty Made to differentiate itself.
Speaking of differentiation, another thing investors may want to keep on their radar is the possibility of a lawsuit regarding Tasty Made’s name and logo. Another burger chain, Tasty Burger, sent a cease and desist letter to Chipotle, claiming that the new business’ name and logo were too similar. Chipotle responded, saying that the two brands will be able to co-exist without causing consumer confusion, but Tasty Burger may take things a step further and sue Chipotle for infringement.
Bottom Line on Chipotle Stock
Chipotle’s new burger chain has the potential to provide the company with a renewed source of income and its Mexican restaurant chain is likely to overcome the food safety fallout in the coming years.
However, investing in a company that is bleeding cash is a risky bet, and it’s possible that Chipotle stock has further to fall before making its way higher. Investors who believe in Chipotle’s recovery plan would be wise to wait another quarter in order to see how the firm’s balance sheet is shaping up and whether its current strategy is working before jumping in.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
