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No easy solutions to Chipotle's public image problem

Stock MarketsFeb 07, 2018 09:40AM ET
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© Reuters. A Chipotle Mexican Grill is seen in Los Angeles

(Reuters) - Two years after a string of hygiene-related lapses, Chipotle Mexican Grill's (N:CMG) disappointing quarterly results on Tuesday were marked largely by the absence of major new ideas on how to turn around the burrito chain's battered public reputation.

Chipotle shares fell 10 percent in premarket on Wednesday to $275.50, the lowest since November, with analysts worried by further declines in the number of visitors to its restaurants and predictions they would continue.

Managers said there was hope of a turnaround in the second half of the year, but the Mexican restaurant chain is still being weighed down by the bad PR dating back to an outbreak of E. coli and Salmonella that sickened 50 people in late 2015.

In the months following the outbreaks, Chipotle took drastic measures, including shutting down its system-wide chain for hours to train and educate employees on food safety, added four new board directors, and for the first time in 20 years introduced another protein, Chorizo, to its menu.

It also experimented with a loyalty program briefly, something it once dismissed as unnecessary discounts for frequent customers, and introduced a raft of other initiatives that have so far failed to right the ship.

In November, founder and Chief Executive Officer Steve Ells said he would step aside after failing for two years to rescue sales and the company's reputation. He is still executive chairman.

There were some signs of progress in the fourth quarter: training, field support, and refocused incentive programs have begun to move the needle on satisfaction scores, speed of service, and hospitality, according to the company.

Same-restaurant sales in the fourth quarter also rose better than analysts had expected, in part due to price hikes.

But Wall Street analysts said that it remained a long road back to pre-outbreak sales levels.

"Same-store sales have begun to recover, but food safety outbreak impacts and operational overhang remain," said Morgan Stanley (NYSE:MS) analyst John Glass, who is rated 4/5 stars for his estimate accuracy, according to Thomson Reuters StarMine.

Analysts were divided on what more the company needed to do to get back the customers it has lost, but a majority lauded the company's efforts to put more of its savings into labor, new stores and building its mobile ordering efforts.

"Guest experience and digital efforts in 2018 could help stabilize and then grow traffic, which would allow for margin expansion," Jefferies analyst Andy Barish said.

However, brokerage Stifel in a note titled "Investors still waiting for earnings with integrity" said it found Chipotle's spending and capital allocation missing the mark.

"We struggle to see how the company justifies its general & administrative spending plan for 2018 and why it does not allocate even more capital to existing stores and less to new stores," Stifel analyst Chris O'Cull said, downgrading the stock to "sell".

UBS also cut Chipotle to "sell" earlier this week, citing a difficult industry and "brand perception challenges".

Overall, brokerages are on the fence on Chipotle, with 24 of the 35 analysts covering the stock rating it "hold" and the others split almost down the middle.

Its median price target is $306.36, compared with its Tuesday close of $304.33.

No easy solutions to Chipotle's public image problem

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