Here’s Why We Have Revised Our Price Estimate For Chipotle Mexican Grill To $328
Chipotle Mexican Grill (NYSE: CMG) has been going through a rough phase. While the first quarter of 2017 showed signs of a turnaround after a tough year of falling sales due to the E. coli virus, a few subsequent incidents have impacted recovery. The company reported a payment card security incident which affected most of its restaurants between March 24th and April 18th 2017. This impacted its fragile reputation to some extent. However, an isolated incident of a norovirus outbreak at one of its restaurants has jolted the company’s reputation significantly. In its Q2 2017 earnings call, Chipotle mentioned that this event hurt comparable sales negatively by 5.5% in the few weeks between the incident and the earnings call. While the company is launching new menu items including the highly demanded queso, which are likely to attract customers, this growth can get offset by the new virus incident, given that the company’s reputation has already taken a beating. Further, Chipotle is looking to increase its prices in select locations and if this price rise does not go well with customers, it can impact revenues further.
Based on these developments we have revised our price estimate for the company, changing the following key drivers:
- Average number of visits per restaurant per year: We earlier expected this number to increase by 3% between 2016 and 2017 and a gradual increase thereafter. We now expect this growth to be 1.5% between 2016 and 2017 and the company to maintain this steady growth rate over our forecast period. This change leads to a slight decline in our revenue growth estimates for the company
- Average spend per customer visit: We do not expect any change in the average spend per customer at Chipotle’s stores for the next two years and a slight increase thereafter.
- As the beta of the company increased from 0.51 in May 2017 to 0.67 in August 2017, we have revised our discount rate for the company from 7.1% to 8.5%
We will re-visit our valuation for Chipotle Mexican Grill once the company releases the results for the next quarter to quantify the exact impact of the isolated virus incident and new menu items on the company’s comparable sales and revenues.
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