Chipotle Sales Tumble 23% as Food-Safety Fallout Persists

April 27, 2016 07:42 AM
Chipotle Sales Tumble 23% as Food-Safety Fallout Persists

Chipotle Mexican Grill Inc. posted first-quarter sales that trailed analysts’ estimates and reported its first loss as a public company, reminding investors the chain faces a long road to recovery from the food-safety crisis that has engulfed it since November.

Revenue tumbled 23 percent to $834.5 million, the Denver-based company said in a statement Tuesday. Analysts projected $863.3 million, on average. Same-store sales dropped for the second straight quarter, plummeting 29.7 percent. Analysts estimated a 28.4 percent decrease.

Chipotle has struggled to regain its footing following an E. coli outbreak that sickened dozens of customers last fall. Despite a flood of coupons and marketing spending meant to draw customers back to its restaurants, the chain once known for industry-leading margins has so far been unable to reignite sales growth.

“Chipotle is looking at a 2017 recovery at the earliest, perhaps going into 2018,” said Asit Sharma, an analyst at The Motley Fool. “The turnaround is predicated on doing whatever it takes to get customers back in the store at least once, to restore their confidence level with the brand. So they need to stick with this strategy, however painful the near term is.”

The shares fell 2.2 percent to $435.90 at 4:51 p.m. in late trading after the results were released. Chipotle already had slipped 7.1 percent this year through Tuesday’s close.

First Loss

The company’s loss in the quarter was 88 cents a share, compared with profit of $3.88 a year earlier. Analysts predicted a loss of $1.05, on average. The figures may not be comparable.

Chipotle said last month that its loss in the period would be $1 a share or more as higher spending on food safety and marketing costs weighed on results. The quarterly loss was the first since Chipotle went public in 2006.

The steep decline in same-store sales didn’t come as a surprise: Chipotle had previously announced that sales plunged in January, February and the first two weeks of March. Comparable-store sales fell almost 15 percent in the fourth quarter, and have now dropped for at least four straight months.

Chipotle’s sales had started to recover last month before fresh reports that workers at a Boston-area restaurant got sick with norovirus. That location was shuttered for cleaning and no customers got sick. Still, the negative headlines once again sent sales plunging.

Difficult Road

That downbeat news has rocked Chipotle for roughly six months, throwing a spotlight on its difficult road to recovery. The crisis began in November, when the Centers for Disease Control and Prevention announced an investigation into an E. coli outbreak. That brought attention to previous foodborne illnesses linked to the chain. Then came news that scores of Boston College students had gotten sick with norovirus after eating at Chipotle. By March, Chipotle had mostly been out of the news for the better part of a month. Then the Massachusetts workers got sick.

Last month, Chipotle hired Jim Marsden, a former professor in Kansas State University’s Animal Science and Industry Department, as its executive director of food safety. The chain has vowed to make its restaurants the safest in the industry, while saying the new safety measures will increase its food costs by about 2 percentage points. Still, the chain reiterated that it can restore its profit margins as sales improve. Chipotle has also said it wouldn’t slow the pace of new restaurant openings, with as many as 235 slated for 2016. The company said Tuesday that it added 58 locations in the first quarter.

Operating Margin

Chipotle may need another two years before recovering its previous level of sales per restaurant, and even then the chain will suffer from lower profitability, Nick Setyan, an analyst at Wedbush Securities, said in a recent note. Chipotle said its restaurant operating margin contracted to 6.8 percent in the first quarter, down from 27.5 percent.

Chipotle also faces legal issues. Last month, the company said it received a second subpoena from the U.S. Attorney’s Office for the Central District of California that expanded the scope of a previously announced investigation. The probe initially focused on a norovirus outbreak at a single restaurant in California, but now pertains to “companywide food safety matters dating back to Jan. 1, 2013.”

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