Chipotle Mexican Grill: The Story Behind The Tumbling Stock

Is this the decline that ends the growth story? Can Chipotle make a flying comeback? Or has the market finally got it right for Chipotle?

Chipotle Mexican Grill’s (NYSE:CMG) stock tumbled more than 25% in the last two months from $750 to $550, while the S&P 500 has gained 5% over the same period. The E.coli (Escherichia Coli) outbreak has caused serious harm to the company’s operational stability. Moreover, lowering of the guidance for Q4 2015, as well as for the fiscal 2016, has generated doubt among the investors regarding the company’s near term prospects.

Considering the recent events, Trefis has revised its price estimate for the company to $560, with a $15.50 EPS estimate for the fiscal 2015. Chipotle’s stock is currently trading around $535.

See Our Complete Analysis For Chipotle Mexican Grill

Where It All Began?

• Concerns Regarding Food Safety

Since the start of 2015, Chipotle’s investors have been somewhat on the edge, due to the slowing quarterly growth of the company. Despite the strong 20% year-over-year (y-o-y) revenue growth and 47% y-o-y increase in the net income in the first quarter of fiscal 2015, the company’s stock slumped 7% just after the release of the report, primarily due to slower growth in the comparable store sales. Chipotle blamed the harsh weather conditions and temporary termination of Carnitas supply in some of the stores for the slowness. (See: Chipotle Mexican Grill: Pork shortage slows down comparable sales growth) The company’s decision to suspend one of its pork suppliers in the U.S. after an audit, on claims of below standard animal welfare protocols, did not go down well among the investors. The pork supply constraint affected one-third of the company’s outlets in the nation. As a result, we revised our price estimates for Chipotle down to $669.

However, as part of recovery efforts and to counter the situation, Chipotle added a new pork supplier, Karro Food Group, U.K., which bought major relief to the affected stores. With improvement in customer traffic and comparable store sales growth, the investors reacted, this time positively, and the stock mushroomed to its all-time high of $758. (See: Stock touches all-time high, as Chipotle fills in the gaps)

It was clear that Chipotle, who preaches the concept of ‘food with integrity’ and hygienic food, cannot go wrong in their own game. Unfortunately, Chipotle’s future was stained with an event similar to McDonald’s food safety scandal in China last year. In fact, it was more severe for a young company whose investors seemed ready to pull out even on slim indications of instability.

• E.coli Outbreak Made Chipotle’s Case Weak

During the first week of November, Chipotle temporarily closed 43 of its restaurants around the Seattle and Portland regions of the U.S., under threats of an E.coli outbreak. According to the Centers for Disease Control and Prevention, around 22 people fell victims to the E.coli, the most common bacteria in food-borne outbreaks. ^[1] According to the official statements made by the company, it has received notice from health officials regarding the contaminated food. This is the third time in the last 4 months that the food chain has been accused of food contamination, where the earlier cases involved outbreak of salmonella and norovirus. ^[2]

On November 10, 2015, after numerous sample tests and inspections, Chipotle announced the reopening of those 43 stores, with a promise that the affected locations will come up with a fresh supply of all the ingredients. Moreover, the company added that it is constantly working on improving the food handling operations and inspections of all its nationwide locations. A week later, a few more cases were reported in six different states, most of them linked to Chipotle stores. This aggravated the situation for the company and instilled fear among the investors. Consequentially, CMG stock took a blow and it dove nearly 13% down to $536.

What’s The Damage?

Apart from the fact that the stock came plummeting down to its 18-month low, the market was more concerned with the Chipotle’s response and expectations for the upcoming quarters. There was no doubt that the comparable sales growth for the fourth quarter was expected to be much slower year-over-year. On December 4, 2015, Chipotle released a report mentioning the sales figures and trends so far in this quarter. On one hand, October comparable store sales growth was a positive low-single digit number, whereas on the other hand, comparable store sales growth for November was -16%, primarily due to the temporary closing of the 43 stores in the two states. ^[3]

Furthermore, the company mentioned that if the trend continues, the food chain might post a comparable store sales decline of -8% to -11% for the fourth quarter. Also, the restaurant level operating margins are expected to drop down to the 22%-24% range, whereas the diluted EPS is expected to be in the range $2.45 to $2.85. On December 7, 2015, the stock further went tumbling, down 7% in the first trading hour to $517, before recovering back to $550. Trefis estimates the company’s diluted EPS to be $15.50 and net revenues to sum up to $4.54 billion for the fiscal 2015.

Moreover, Chipotle’s officials mentioned that they cannot estimate the impact of this event on the fiscal 2016 comparable store sales growth. However, it is safe to say that, considering the slowing comparable store sales growth every quarter, 2016 will be a tough period for the company in terms of top-line performance. Trefis estimates the customer count to drop by 1% y-o-y in the fiscal 2015, and further 1.5% y-o-y in the fiscal 2016.

With such a significant damage to the comparable store sales, it is highly likely that a poor result coupled with a dull guidance for 2016, might even take the stock down below $500. We will just have to wait for the fiscal year 2015 report for that.

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More Trefis Research

1. Amid E.coli outbreak, Chipotle closes 43 restaurants in Washington, Oregon [↩]
2. Chipotle shuts Seattle, Portland store after E.coli outbreak [↩]
3. Chipotle Mexican Grill, SEC filing 8-K, December 4, 2015 [↩]