Chipotle Mexican Grill, Inc. (CMG) Stock Has Lost the Mandate of Heaven

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Chipotle stock - Chipotle Mexican Grill, Inc. (CMG) Stock Has Lost the Mandate of Heaven

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Chipotle Mexican Grill, Inc. (NYSE:CMG) posted another quarter with negative comparable-store sales, and no one is happy about it. The news has analysts questioning CMG’s business premise and sky-high valuation, and has shareholders abandoning Chipotle stock.

Chipotle Mexican Grill, Inc. (CMG) Stock Has Lost the Mandate of Heaven

CMG did earn $7.8 million, 27 cents per share, on revenue of $1.036 billion for the three months ending in September. But that compared with net income of $144.9 million, or $4.59 per share fully diluted, and revenue of $1.216 billion a year ago.

Sales dropped almost 15% despite its opening a net of 53 new restaurants during the quarter, as sales per restaurant were down 22% from a year ago. What’s amazing is that is an improvement from previous quarters — revenue for the year so far is down 29% from a year ago.

After earnings were reported, Chipotle stock fell, and it’s set to open Wednesday off about 3%. That would put shares down nearly 50% from last August’s highs.

Some are wondering where the actual bottom in CMG shares may be.

Chipotle Stock Still Reeling From the Scandal

Chipotle was rocked by a series of E. coli outbreaks last year that eventually sickened 500 people. The company tried to recover with advertising and a frequent-buyer program called Chiptopia, but top marketing executive Mark Crumpacker was accused of violating drug laws and others are now accused of inflating the stock price.

In response, CMG tried a marketing program built around a four-minute video shown in theaters, and the frequent buyer program. It didn’t address the key concern: that its emphasis on fresh, natural food was leaving it vulnerable to infections. As icing on the cake, Chipotle is also facing a sexual harassment suit in southern California, a key market.

Many now fear that the company’s reputation — and by association, Chipotle stock — has taken a permanent hit.

CMG was once known for lunch lines going around the block. And it can still get customers a $10 meal very quickly, using a cafeteria line and a clearly-written wall menu describing how to put the rice, beans and meat selections together in a flour tortilla or a bowl.

Management was confident that marketing, incentives and time would cause people to return, but they have not returned in huge numbers. Over the past year-plus, CMG has lost almost half its value — that’s after zooming from $300 per share to $700 between 2013 and mid-2015. The C-suite’s happy talk got shares over $500 in March, but now we’re back to searching for a new bottom.

Try Something Different?

Management also has sought to separate itself from its past by opening different kinds of restaurants.

A Thai chain called Shophouse was abandoned, but the company still is trying to build a pizza chain called Pizzeria Locale and a burger chain called Tasty Made. That’s all based on the same premise of quick, natural, flexible menus of Chipotle, before the problem at the original restaurant has been fully repaired.

In his earnings call, CEO Steve Ells talked about an ongoing recovery, menu innovation and digital ordering. He said chorizo sausage, introduced this year, now makes up 7% of the company’s orders. He also said CMG hopes to offer a dessert option soon. Chipotle also is introducing a faster make-line for quicker assembly of orders, and ordering on tablets.

But speed isn’t really Chipotle’s problem, is it?

Analysts on the call were skeptical, saying in-store innovations and marketing are no substitute for “focusing on delivering the high-quality experience.” Analysts also asked why the company continues to open new restaurants when its existing units are performing so poorly.

Many analysts have soured on Chipotle stock over the past year, with most now only calling it a hold, and a growing number telling investors to sell.

Bottom Line on CMG

Management has lost the “mandate of heaven” that made Chipotle a hot stock earlier in the decade. Its reputation with customers has not recovered. The company’s tinkering at the edges — faster order, faster preparation and TV advertising — is no longer seen as a solution for what seems like a more basic problem.

Chipotle, in short, has lost the plot.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.

Some are calling Chipotle stock “cheap,” given its steep fall. But CMG still is priced at 3 times sales, while rivals like Panera Bread Co (NASDAQ:PNRA) — up big this morning on earnings, by the way — can be had for less than 2 times sales.

Chipotle’s glory days are now well behind it. In the future, Chipotle stock should be evaluated alongside other quick-service chains like Jack in the Box Inc. (NASDAQ:JACK), which owns the competing Qdoba chain and also sells at twice its revenue.

Dana Blankenhorn is a financial journalist and author of the science fiction story Into the Cloud. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/chipotle-mexican-grill-inc-cmg-stock-lost-mandate-heaven/.

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