Chipotle Mexican Grill, Inc. (NYSE:CMG) stock holds many lessons for investors. With earnings coming up on Tuesday, CMG stock investors may get additional difficult lessons regardless of how the numbers come in.
Analyst consensus is for $2.21 per share on revenues of $1.19 billion. If I were Chipotle or an investor at this point, I’d be happy if same store sales are even positive.
The good news is CMG has always been a generator of strong cash flow. It should have at least $50 million of FCF this quarter. With over a half billion dollars in cash and no debt, the company remains on sound financial footing.
One of the biggest lessons with Chipotle stock is how quickly fortunes can change with high-flying momentum stocks. The stock was soaring, on the back of fantastic same-store sales, a robust program of growth built on cash flow instead of debt, a good product and a highly efficient service method.
Yet all it took was a food-borne illness scare that wouldn’t go away and poor crisis management, and CMG stock was never the same.
The Fall of CMG Stock
Chipotle stock hit $742 on July 1. A few days later, the first report hit and since then, the stock has lost more than half its value. Patrons have abandoned the stores. Just when it seemed like things were picking up, another food scare hit the company.
Because of the company’s exceptionally awful response to the outbreaks, faith in the product has soured. In the world of fast-casual dining, it is easy for people to get distracted by other brands. Fast-casual chains have the benefit of being ubiquitous, so if an office building has workers that bust onto the street for lunch, and they have several choices for fast casual, you can’t afford to have a bad rep.
I think, given the most recent bad news, Chipotle’s management needs to step aside for a bit. Just take a sabbatical. Bring in a re-branding and crisis specialist. The danger of repeat problems killing the brand name is very real.
I mentioned to some friends that I had lunch there the past few days, and noticed the portions were considerably smaller — as in 20-25% smaller. Rather than comment on the expense reduction this represents, these average consumers said, “Less food to get sick on.”
Chipotle cannot survive as a brand if the very word that is the brand is equated with illness and dark humor. Half a billion in cash and no debt can only go so far when your brand implodes.
Bottom Line on Chipotle Stock
I think CMG needs to completely — and I mean completely — re-brand itself. Change the stores from top to bottom. Then, and most importantly, go over the entire health safety protocol with a fine tooth comb, several times. Go above and beyond regulatory requirements. Show the public how their food is handled from start to finish to reassure them of the cleanliness embedded in the system. Give employees strict orders to never come to work if at all sick. Re-establish confidence in the public.
Don’t just give away free burritos. It doesn’t work.
Of course, since the Virginia norovirus scare this past week, coupled with a story from Dallas about mice or rats falling from the ceiling, there’s no telling how that will affect Q3 numbers. CMG is just having terrible luck, but it’s the poor response that is killing it. It’s a shame because I like the food, the convenience, and the service. It’s a good product. I just wish management started taking the right steps.
As it is, CMG stock trades at more than 100x trailing-twelve-month earnings. That’s hard to digest.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected].