Chipotle Continues To Flounder In 2016
The year 2016 was another miss for Chipotle. The company continued to find conditions challenging, and failed to see any meaningful improvement in its key metrics. The third quarter results, with comparable sales down -22% y-o-y and revenues down -15% y-o-y, failed to make a mark. Although macroeconomic conditions are said to be improving, recent reports suggest a rise in non-discretionary costs, such as car loans, house rents, prescriptions. Moody’s Investors Service revised its operating-profit growth forecast for the restaurant sector, and revised its outlook to stable from positive. The ratings agency is now expecting operating profit to grow 2% to 4% in the next 12 to 18 months, down from a previous forecast of growth of 5% to 6%. This view has been supported by analysts at Deutsche Bank as well. This could be detrimental to the already suffering Chipotle’s turnaround.
Furthermore, the possibility of a federal wage hike is likely to weigh very heavily on Chipotle’s stock, which has already fallen 15% in the last three months. Chipotle has 18% of its stores in California. California has been pushing for a wage hike to $15/hour by 2022. This move is likely to increase the company’s labor costs in the area by almost 50%. Consequently, we expect Chipotle’s margins to be adversely affected and costs will represent a far greater percentage of total sales.
In the recently concluded conference of the restaurant industry, Chipotle’s management announced that it will consider raising its menu prices to offset the affect of wage pressure. Furthermore, it will put a hiring freeze on to save on operating costs. The management also added that the company is “nervous” about hitting the guidance, and attributed the longer lines to a slower throughput, than actual traffic. This news left the Chipotle stock reeling downwards.
The drop in Chipotle’s Stock Price In Last 5 Days
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Some have gone to the extent of suggesting that the most probable way to work around a turnaround is likely converting its stores to franchises or licensing them. This will at least help reinstate company’s margins, and may restore the faith of customers back in the brand. However, the point to be noted here is that will there be any buyers for a Chipotle franchisee?
On the plus side, however, a drop in avocado prices could help the company by benefiting the expenditure made on food costs. Food costs represent roughly 35% of company’s sales, and have increased more recently. The drop in avocado prices is a welcome relief for the company, and could support margins which are likely to suffer from increasing labor costs. Another product which is widely used as raw material and could cushion the impact of wage hikes on operating costs is beef and pork prices. The prices of beef and pork have fallen considerably in recent months.
CMG hopes to distract its consumers away from the norovirus incident and capitalize on the the concept of responsibly raised beef through the launch of its burger chain, Tasty Made. However, we remain skeptical about the success of the chain, given the immense competition it has to face from giants like McDonald’s and Burger King, not to mention the other smaller players in the market.
Have more questions about Chipotle Mexican Grill (NYSE: CMG)? See the links below:
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- 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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