Chipotle Fails To Deliver, Sales Growth Remains Sluggish In Q3 2017
Chipotle Mexican Grill (NYSE: CMG) announced its Q3 2017 results on October 24th and the company failed to meet analyst expectations (which were not very high) for both revenues and earnings per share (EPS). The company’s EPS was impacted negatively by $0.64 due to the data security incident it faced in April 2017 and by $0.13 due to the Hurricanes Harvey and Irma.
Despite the launch of its new menu item – the much in demand queso — the company reported only a 1% increase in comparable sales for Q3 2017. The company’s comparable sales in July were impacted by the isolated norovirus incident (though this is not being explicitly stated by the company) and from mid-July to September 11 – before the unadvertised launch of queso, comparable sales were down 2.25%. After September 11, the company saw a 4% increase in comps (excluding the hurricane impact), post the launch of queso. The company stated that currently around 15% of its customers continue to order queso and around 19% of its new and returning customers are ordering queso. In October the company has seen a 2-3% growth in comps. It appears that the launch of queso has set-off the impact due to the isolated norovirus incident, but has not created a very significant positive impact for the company.
Below is a summary of Chipotle’s financial performance for Q3 2017:
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Higher avocado costs have impacted the company’s food costs in Q3 2017 and general administrative costs in this quarter were higher due to an estimated $30 million charge for the data security related incident. This has impacted the profitability of the company in this quarter. Further, the number of restaurants opened in Q3 2017 is lower than the quarterly average so far. The company now expects to open 130-150 restaurants next year, lower compared to the previous years as it focuses on operations of its existing restaurants. According to the company, hurricane impact, higher avocado costs, store closures, and the data security incident impacted the company’s EPS by $1.05 in Q3 2017. Sales were lower by nearly $6 million during the downtime of the hurricanes and expenses related to the hurricanes impacted the EPS by $0.07.
Below is a summary of Chipotle’s expenses for Q2 2017:
Chipotle Mexican Grill’s woes are far from over. Q3 2017 results indicate that the company still has a long way to go to build trust and loyalty and attract customers back to its stores. The company detailed a list of measures it is taking to drive revenues, including some management and leadership changes, and a focus on operational excellence to deliver better guest experience. However, it does not appear that these measures will bear fruit soon and the company has a tough and long road to recovery ahead.
We will be updating our model for Chipotle Mexican Grill based on these results and this can lead to a change in our price estimate for the company.
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