Chipotle Mexican Grill, Inc. (NYSE:CMG) is due to report earnings after close on Tuesday. Meanwhile, research outfit UBS recently downgraded Chipotle stock from “Neutral” to “Sell,” sending CMG shares down 4% — just when it looked like higher highs were on the table.
The ultimate culprit: 2015’s E. coli outbreak. The Tex-Mex eatery sickened more than 50 people and damaged its reputation as higher-quality fast food.
So is this selloff a reason to step into CMG stock on the cheap? After all, revenue is likely going to show nearly a 15% improvement for all of 2017 once its fourth-quarter numbers are in. And meaningful profit margins have more or less been restored.
The problem is, however, as much as Chipotle Mexican Grill has turned things around, there’s still more ground to regain. And there’s no assurance it will be able to reach that proverbial end zone.
Earnings Preview
For Q4, analysts collectively expect Chipotle to turn $1.11 billion in revenue into earnings of $1.32 per share. Both are much better than their year-ago comparisons, when the company generated sales of $1.03 billion and earned $1.32 per share of Chipotle stock.
Don’t be overly impressed though.
A year ago, the restaurant chain was still struggling with the fallout from its role in an E. coli breakout which — if we’re being honest — was handled very poorly from a public-relations perspective.
Last year, Chipotle was also the source of a norovirus outbreak. And that very same month, rats rained down from the ceilings at one of its restaurants. The matter went viral all too quickly.
Time has passed to let consumers forget about the 2017 reprisals of the company’s hygiene problems. Given the sheer number of embarrassing issues that have surfaced for Chipotle, however, it’s likely that consumers aren’t forgetting this time around.
Consumers Just Aren’t Buying It
Chipotle stock’s reality was quantified by UBS. Analyst Dennis Geiger explained:
“Despite aggressive efforts to improve brand perceptions through a new national advertising campaign and the launch of new products including queso recently, customer review scores have not shown any signs of improvement.”
In numerical terms, online reviews of Chipotle rate the eatery at right around a 2.5 (on a scale that reaches 4.0), down from the late-2015/early-2016 score of roughly 2.8. That score is also still trending lower.
The biggest concern, of course, remains food safety, and not marketability or price points.
As Geiger also pointed out, McDonald’s Corporation (NYSE:MCD) is drawing a bigger value-oriented crowd, while Panera Bread is enjoying the benefits of the crowd that’s steering clear of Chipotle but still seeking a slightly-higher-end quick-service experience. Subway and Yum! Brands, Inc’s (NYSE:YUM) Taco Bell are also benefiting from Chipotle customers searching out other options.
But still, sales are on the rise. This proves Chipotle is doing better… right? Maybe, or maybe not.
It requires a little number crunching to see it, but the amount of revenue each Chipotle is currently producing isn’t actually growing. It’s leveling off at around $1.95 million per year.
That’s down from an average of $2.5 million as of Q3 2015, right before the E. coli problem surfaced. All the growth has come from the establishment of new restaurants, which is still creating cannibalization headwinds.
Bottom Line for Chipotle Stock
While Tuesday’s Q4 report will be well watched, the bottom line really isn’t all that important.
Estimates are just an educated guess about a company that’s in flux. And Chipotle has missed estimates about as often as it’s hit them since early 2016, when the fallout from the E.coli outbreak first surfaced.
What’s more important right now is Chipotle’s plans to regain credibility. Nobody really knows what to expect. The company continues to pull all sorts of levers (like new menu items) in an effort to rekindle same-store sales growth. So far, none have worked.
If E. coli had been Chipotle’s only health concern, customers would have forgiven and forgotten by now. With last year’s rat problems and norovirus incidents, limited as they may have been, consumers have established an ugly perception of the restaurant that will be tough to break.
Tuesday’s report will only be a short chapter in that saga.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
