Chipotle’s Q3’16 Performance Fails To Impress; Tough Road Ahead
Releasing its third quarer earnings on 25th October 2016, Chipotle Mexican Grill (NYSE: CMG) reported a drop in both its revenues and earnings. Furthermore, it missed the consensus estimate not only for the aforementioned metrics, but also for comparable sales. This indicates that the traction seen in the previous quarter, owing to promotional activities and the launch of the loyalty program, is not exactly accretive to the brand.
Chipotle’s revenues were down 15% on an annual basis, despite the various marketing and promotional gimmicks it has been offering. To make matters worse, the company’s operating expenses rose by as much as 7% y-o-y, excluding depreciation and impairment charges. Even as a percentage of revenue, operating expenses continued to be higher, likely due to heavy spending on advertising and marketing campaigns that Chipotle has undertaken to restore its brand image. Consequently, the company’s margins suffered a significant decline. However, the company’s management marks this year as that of reinvestment towards future growth, and remains confident about the outlook for 2017, with improving margins and comps.
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Talking about comparable sales, which were estimated to fall by roughly 19% by analysts, but came in at -22%, which is much lower than expected. Although sequentially there was an improvement in the metric, it is barely noticeable. In order to recover its comps and enhance the guest experience, Chipotle is contemplating adding more menu items and tying the whole experience together through digital innovation. The company hopes that this will increase the visits per customer and return lapsed customers back to its restaurants, resulting in comps to fall only in low single digits in the fourth quarter. We think that it may be too early to make such a claim, as its key statistics remain under pressure restaurant-wide, including the freebies it has been giving away.
The Way Forward
Chipotle announced its decision to no longer invest in its brand ShopHouse, while impairing all the assets associated with the brand in this quarter. However, it remains confident about its investments in the burger and pizza chains it has decided to open. Further, given the current scenario, it will be investing heavily in the expansion of Chipotle in Europe. To this end, Chipotle has hired Jim Slater as the director in Europe, the man behind Costa Coffee’s ascent to the number one coffee brand in the U.K.
The management said that expects the growth in number of new restaurants to be between 195-210 in 2017, which will complement the new, cost-effective restaurant design to drive cost savings and push comps back to positive. Chipotle’s management also projects to deliver a restaurant level margin of 20% and an EPS of $10 in 2017, which may be a bit of a stretch given the less than $4 it is likely to earn in 2016. But time will tell.
Have more questions about Chipotle Mexican Grill (NYSE: CMG)? See the links below:
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- What Impact Can The Continued Fall In Spend Per Visit Have On Chipotle’s Stock Price In The Next Year?
- How Has Negative PR Affected Chipotle’s Operating Efficiency?
- What Can Produce Over 10% Upside To Chipotle’s Stock In The Next Year?
- How Is Chipotle Dealing With The Aftermath Of The E.coli Outbreak?
- Down, But Not Out: Chipotle Returns To Profitability In Q2’16, Despite Weakness In Top Line
- Chipotle Mexican Grill Q2 FY’16 Earnings Preview: Recovery In Top-line Likely To Be Weak
- Chipotle Mexican Grill Struggles in Q1 FY’16 As Last Year’s E.coli Controversy Impacts Comparable Sales
- Chipotle Mexican Grill FY 2015 Earnings Review: E.Coli Scandal Hinders Top-line Growth
- What’s Chipotle Mexican Grill’s Fundamental Value Based On Expected 2016 Results?
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- How Has Chipotle Mexican Grill’s Operating Metrics Changed Over 2011-2015?
- Where Will Chipotle Mexican Grill’s Revenue and EBITDA Growth Come From Over The Next Three Years?
- Chipotle Mexican Grill Q1 FY’16 Earnings Preview: E.coli Scandal Might Still Impact Top-line Growth
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