Mixed results weigh on Chipotle shares
Oct. 26, 2017
by Eric Schroeder
Chipotle plans to scale back new restaurant openings.
DENVER – Shares of quick-service restaurant chain Chipotle Mexican Grill, Inc. opened at a 52-week low of $277 per share on Oct. 25 after company executives described a difficult operating environment that has prompted the company to scale back new restaurant openings. The Denver-based company’s share price was down 14.6 percent from the previous day’s close of $324.30. Reaction from the investment community came against a backdrop of financials that, while stronger than year-ago results, failed to meet analysts’ expectations.
Net income in the third quarter ended Sept. 30 totaled $19,610,000, equal to $0.69 per share on the common stock, up 151 percent from $7,799,000, or $0.27 per share, in the same period a year ago. Revenues also improved, increasing 8 percent to $394,567,000 from $363,900,000.
The company’s results in part were adversely affected by hurricanes Irma and Harvey as well as costs associated with an April malware attack.
|Steven Ells, founder, chairman and CEO of Chipotle
In an Oct. 24 conference call with analysts, M. Steven Ells, founder, chairman and CEO, said Chipotle made “meaningful progress” during the period, including making important strides in restoring consumer trust and driving sales.
“Our third quarter saw the roll-out of our largest-ever television advertising campaign, which we used to promote queso,” Ells said. “Not only did this campaign successfully change the narrative about Chipotle, early indications are that it’s driving sales at the start of the fourth quarter. …
“We also drove sales through our ongoing efforts to strengthen digital ordering, which continues to perform near record levels for us. Since implementing Smarter Pickup Times earlier this year, we’ve seen a 51 percent increase in digital orders. Because our digital orders are made on a second make-line, it allows us to deliver excellent throughput and enhance the experience for our customers who are increasingly moving to digital ordering.”
Chipotle's digital ordering platform helped boost sales.
Ells said Chipotle also has made significant progress toward fostering innovation, driven in part by the creation of the NEXT team. NEXT is focused on innovations in the kitchen and restaurant design, the menu and the guest experience, and Ells said the team already has developed a NEXT Kitchen in Manhattan, New York, where Chipotle is able to test the operational impact of potential new menu items prior to broader market testing.
One of the more significant actions taken by Chipotle during the third quarter was the nationwide launch of queso. The launch has generated a wide range of responses among consumers — good and bad — but, according to Chipotle, has provided an immediate lift to sales.
|Mark Crumpacker, chief marketing and development officer for Chipotle
“Currently, about 15 percent of our customers continue to order queso,” said Mark Crumpacker, chief marketing and development officer. “This new menu item not only increased sales with existing customers, it also attracted new and lapsed customers into our restaurants. About 19 percent of these new and returning customers are trying queso, while many of the others were simply driven in by the advertising. We know that each of these visits is essentially a test run of Chipotle and is an opportunity for us to remind our guests of the delicious food, quality of our ingredients and convenience of dining at Chipotle. Awareness and sentiments around queso are also encouraging, with more than 80 percent of our customers indicating that they are aware of our queso and more than half of respondents indicating they thought our queso was better than that offered by our competitors. Ninety-three percent of customers that tried queso on an entree said they like our queso, and more than half indicated they would be likely to visit Chipotle more often because of the queso.”
About 15 percent of Chipotle customers continue to order the new queso.
With a focus on the reorganization of its field leadership teams and operating structure, Chipotle said it plans to scale back new restaurant openings over the next 12 to 18 months. Crumpacker said Chipotle now expects to open between 130 and 150 restaurants in 2018, down from projections of 195 to 210 new openings in 2017.
“While we still firmly believe that we have the potential to open up 5,000 restaurants in the US, we have decided that it is a higher priority right now to focus on operational excellence, including improving our training, culture and elevating our guest experience in our existing restaurants,” he said. “Ultimately, we believe this temporary reduction in openings will make us stronger in operations, and we expect the quality and returns of our real estate portfolio will strengthen during this time.”