Chipotle Mexican Grill, Inc. (CMG) Reports a Q2 to Forget

Chipotle stock barely shrugs after Q2 earnings, but make no mistake ... the once-iconic Tex-Mex restaurant still is struggling with an E. coli blunder

The Potential Chipotle Stock Rebound Is All About Brian Niccol

Source: Mike Mozart Via Flickr

Tex-Mex eatery Chipotle Mexican Grill, Inc. (NYSE:CMG) wasn’t expected to do all that well last quarter, and sure enough, it didn’t. Perhaps the only saving grace is that Chipotle stock was off just a couple of percent in the early minutes of Thursday’s after-market trading.

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CMG reported a profit of only 87 cents per share for the recently completed second quarter. Analysts were looking for a bottom line of 93 cents per share of Chipotle stock, down nearly 80% from $4.45 per share reported in the second quarter of 2015. For perspective, in the first quarter of this year, Chipotle reported a profit of 88 cents per share. Net income fell from $140 million in Q2 a year ago to only $25.6 million last quarter,

The same pros were expecting a top line of $1.05 billion, down 12% on a year-over-year basis, though up 29% on a sequential basis. They got $998.4 million, down 17% on a year-over-year basis.

Same-store sales — perhaps the most meaningful measure of the restaurant chain’s marketability — were down 19.3%.

Chipotle Stock Still Needs Plenty More for a Comeback

Chipotle Mexican Grill operates more than 2000 locales across the nation, and has become a favorite of many consumers thanks to its fast, fresh and custom-built burritos and tacos. In November of last year, however, the restaurant chain was the source of an E. coli breakout that infected 55, but spooked an entire nation of consumers. The value of Chipotle stock still is 40% lower than it was before the gaffe, as the market has seen little to suggest the company has shrugged off the impact of the e coli embarrassment.

CMG has made efforts in the meantime to restore goodwill and confidence, but the impact of that effort has been anemic so far. In the first quarter ending in March, revenue fell 23% on a year-over-year basis, to $834.4 million. Q2’s numbers weren’t much better.

CEO Steve Ells said of last quarter’s numbers:

“We returned to profitability, and saw a modest improvement in comp sales trends in the second quarter. Our most recent marketing efforts, led by our Chiptopia frequency program, are off to a nice start in the third quarter, as customers are embracing the program and nearly 30% of all transactions are engaged in Chiptopia. Our entire company is focused on restoring customer trust and re-establishing customer frequency, and rewarding our most loyal customers for visiting more often through Chiptopia is one way to do just that. While it has only been a few weeks since Chiptopia launched, we are pleased to see that July sales comp trends have already improved by 200 to 300 basis points, and transaction comp trends have improved by an even greater amount.”

Not unlike Q1, Q2’s expenses were relatively high compared to Chipotle’s normal spending levels. Operating costs rolled in at 96% of revenue, versus only 81% of revenue a year earlier. The greater effort to ensure food safety hasn’t been cheap, and the company has been aggressive with its promotions to get people back in its stores.

Those raised costs may not be going away anytime soon, either. Maxim analyst Stephen Anderson explained earlier this month:

“We regard the current Chipotle promotion, as well as the free burrito and buy-one-get-one promotions earlier in 2016, as a more permanent part of CMG’s marketing strategy… We see this as a permanent ongoing cost that will likely prevent CMG from repeating its cycle-high 17.3% margin.”

One of those new promotional expenses is the so-called “Chiptopia” card, which leads to free food after enough visits. That promotion ends in September, though if it’s the only source of real growth for Chipotle, similar offers could be seen in the near future.

The addition of chorizo, a combination of chicken and pork, to the menu was also meant to widen the restaurateur’s appeal.

Little of this maneuvering seems to have turned things around in a meaningful way, however, and it may be a while before Chipotle returns to its glory days. Morgan Stanley wrote last week:

“A full sales recovery to prior peak volumes could take years in our view, as evidenced by the fact that, according to our survey, approximately 25% of Chipotle customers either have stopped going or reduced frequency, even six months after the last reported food safety incident.”

Morgan Stanley added that while food safety is still significantly weighing on the minds of roughly one-third of the restaurants would-be patrons, a fourth of the same consumer pool reports they’ve simply found other eateries they like better.

CMG shares were off a couple percent in after-hours trading, suggesting investors saw the glass as half-empty rather than half-full.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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