Is The Chipotle Growth Story Over?

After the E. coli virus hit its food in late 2015, Chipotle Mexican Grill (NYSE: CMG) seems to be going on a downward spiral. Between August 2015 (before the E. coli issue) and October 2017, the company’s stock price has declined from a high of nearly $750 to around $268, losing more than 60% of its value. While recovery seemed imminent after the company took several measures to ensure food safety, subsequent incidents such as a data breach and another isolated food virus incident impacted the company’s reputation further.

Click here to see our complete analysis of Chipotle Mexican Grill.

Slower Growth As The Company Looks To Improve Operations

Chipotle’s Q3 2017 results were not very encouraging and for the first time the company lowered its growth target to 130-150 restaurants per year, from an earlier target of around 200-210 restaurants per year. (We are in the process of updating our model to reflect the new guidance). This change was made since the company wants to focus on the operational quality of its existing restaurants and improve comparable sales. The company is tempering restaurant growth for the next 12-18 months before re-accelerating growth.

Click here to analyze how growth in the number of restaurants impacts Chipotle’s valuation and stock price.

Higher food costs are impacting the company’s profitability and with rising avocado prices, Chipotle is now expecting restaurant level margins to be around 20%. Further, costs involved with improving operational efficiency, training programs for employees and food safety measures are likely to impact profitability in the short term. The company is also increasing the spend on marketing and promotions which can lead to lower profitability if there is no corresponding increase in traffic.

Click here to analyze the impact of Food, Beverage and Packaging Costs on Chipotle’s valuation and stock price.

Measures To Achieve Growth Continue

Chipotle is continuing to take various steps in ensuring that its long term strategic goals are met. Recently the company retained Mike Malanga as its advisor and leader for its development team.  Mike’s previous role was in Starbucks where he was responsible for all aspects of development.  Post this new addition the company also appointed Mark Crumpacker as its Chief Marketing and Strategy Officer. Mark is an existing leader in Chipotle and his new role is focused on long term strategic planning, including overseeing the company’s NEXT team which is responsible for menu innovation and improvement of the customer experience.

Chipotle is doubling its efforts on the operations front by ensuring that employees are imparted sufficient training for an enhanced customer experience. The company is also increasing its advertising and marketing efforts to improve its communication with customers. Technology and a strong digital platform remains another focus area for Chipotle.

While Chipotle is striving hard to regain its past glory, we believe it has a long road ahead. A turnaround might not be immediate, but there could a light at the end of the tunnel in the next few years. The company needs to improve its operations and run “virus-free” stores without any issues for a significant period of time to restore customer confidence. Public memory is short but in the times of social media, even small incidents spread too fast and are exaggerated.  Even an isolated incident is likely to impact Chipotle since the company is on shaky ground. For the short term, we do not expect Chipotle to grow significantly, but the company might have a promising future if it is able to survive the next couple of years without any incident. Our price estimate for Chipotle is $328 and we are updating our model based on the company’s latest results which could lead to a revision in our price estimate

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