Chipotle Sees First Quarterly Loss Amid Food-Safety Crisis

March 16, 2016 07:14 PM

Chipotle Mexican Grill Inc.’s food-safety crisis has brought an unwanted milestone to the beleaguered restaurant chain: its first quarterly loss as a public company.

Chipotle, which saw sales fall for at least the third straight month in February, now expects a loss of $1 a share or more in the first quarter, according to a statement Tuesday. Higher spending on marketing, legal costs and food safety, including increased waste from discarding ingredients, is weighing on profit, Chipotle said. The chain had previously predicted a break-even quarter.

Customers have been slow to return to Chipotle following multiple foodborne-illness outbreaks last year, even as the company has handed out coupons for free burritos. Same-store sales tumbled 26 percent in February, and they haven’t shown much recovery in the first two weeks of March. Sales would have been even worse in February if it weren’t a leap year, which added an extra day to the month.

The sales numbers indicate Chipotle faces a long road to recovery, according to Asit Sharma, an analyst at the Motley Fool.

“Consumers still have a level of distrust or reluctance to embrace the brand,” he said. “Chipotle is finding that it is indeed able to now move the needle on sales, but the marketing and promotion expense required to pull customers back in is higher than expected.”

The shares fell as much as 5.9 percent to $473.11 in New York on Wednesday. The stock had already lost 25 percent in the past 12 months.

Safety Director

Chipotle named an executive director of food safety on Tuesday, hiring Jim Marsden, a former professor in Kansas State University’s Animal Science and Industry Department. The company is revamping its food-safety protocols and has vowed to make its restaurants the safest in the industry. Chipotle expects the new safety measures to increase its food costs by about 2 percentage points. Still, the chain reiterated that it can restore its profit margins as sales improve.

The company said it drove traffic to its restaurants last month with a free-burrito offer that was available on mobile phones. About 67 percent of customers who requested the coupon redeemed it. Chipotle has also mailed about at least 6 million free-burrito coupons in recent weeks, with plans to send out at least 21 million. The free food has helped boost traffic and remind customers about the “authentic Chipotle experience,” Chief Financial Officer Jack Hartung said during an investor presentation Wednesday.

“Free burritos work -- it brings people into the restaurants,” he said.

Chipotle has been reeling from the crisis since early November, when the Centers for Disease Control and Prevention announced an investigation into an E. coli outbreak. That brought attention to previous foodborne illnesses earlier in the year. A norovirus flare-up then struck in December, sickening scores of college students in Boston and further tarnishing Chipotle’s name.

Boston Restaurant

Chipotle shares took a fresh hit last week when the company closed a different restaurant in the Boston area after employees there got sick. The company said the local staff followed its new food-safety protocols and quickly shuttered the restaurant for cleaning. No customers fell ill in that case, according to the company, though it further hampered demand. Chipotle said sales had been improving before the situation was publicized, but dropped 27 percent the second week of March as the news brought more negative attention to the chain.

Hartung called that decrease a “blip,” saying that overall the company has recovered about a third of its sales in recent weeks. Traffic tied to the coupons boosted transactions, he said.

In addition to trying to recover sales, 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.”

The crisis has cut into the pay of Steve Ells and Monty Moran, the company’s co-chief executive officers. Each saw his compensation fall by more than 50 percent last year, with Ells coming in at $13.8 million and Moran at $13.6 million, according to a recent filing. The company said last month that reduced stock awards for its executives had added 31 cents a share to earnings in the fourth quarter. The company saved another $17 million on reduced bonuses.

The fallout from the crisis has been wide-ranging for a company once known for intense brand loyalty and explosive sales growth. Its shares plunged 30 percent last year, with the crisis wiping out more than $10 billion in market value. Same-store sales fell 15 percent in the fourth quarter, the first quarterly drop for Chipotle as a public company. That included a 30 percent decline in December that was followed by a 36 percent plunge in January. With February’s drop, Chipotle is headed for a second straight negative quarter.

“It’s going to take longer than executives probably reckoned even a couple of months ago to reach previous sales levels,” Sharma said.

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