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Chipotle (CMG) Slips into Q1 Loss, Sales Down; Stock Suffers

Chipotle Mexican Grill, Inc. CMG posted mixed first-quarter 2016 results, wherein its loss came in narrower than the Zacks Consensus Estimate but revenues missed the mark. Shares declined over 4.5% in aftermarket trading yesterday, reflecting investors’ disappointment on the first quarterly loss since the company’s IPO in 2006.

Earnings and Revenue Discussion

Adjusted loss of 88 cents per share was narrower than the Zacks Consensus Estimate of a loss of $1.06. In the year-ago quarter, the company had posted earnings of $3.88 per share. The company’s loss was mainly attributable to a substantial decline in revenues.



Revenues plunged 23.4% to $834.5 million because of lower comps, and missed the Zacks Consensus Estimate of $857 million by 2.7%.

The company’s first-quarter revenues continued to suffer due to negative publicity associated with the E. coli and norovirus outbreaks in several states, which surfaced toward the end of 2015.

The company’s first-quarter revenues were marred by the negative publicity surrounding the E. coli outbreak and norovirus outbreak in many states, which began towards the end of 2015. The negative publicity related to the E. coli outbreak, which began in Oregon and Washington, hurt traffic severely. It later spread to seven other states, namely, Illinois, Maryland, Pennsylvania, California, Minnesota, New York and Ohio. Along with this, a norovirus outbreak linked to one of its outlet in Boston's Cleveland Circle added to the company’s woes.

Later, in December, the U.S. Centers for Disease Control and Prevention (CDC) announced that it was probing the restaurateur’s links with another E. coli outbreak (with a rare DNA fingerprint) in three states – Kansas, North Dakota and Oklahoma.

As a safety measure, the fast casual chain was forced to close several outlets. Although these were reopened later with fresh ingredients and deep cleaning and sanitizing, these incidents dealt a severe blow to Chipotle’s sales.

Behind the Headline Numbers

Comps tumbled 29.7%, much worse than the prior-quarter drop of 14.6%. The decline was mainly due to a lower number of transactions in the company’s restaurants, and to a certain extent, was a result of lower average check. This was, in turn, owing to the company’s promotional offers.

Food costs, as a percentage of revenues, were up 140 basis points (bps) to 35.3% due to food testing and waste costs, and higher costs for pre-cut produce items. The rise in food costs was partly offset by a decline in beef prices.

General and administrative expenses comprised 7.4% of the total revenue, reflecting an increase of 140 bps year over year, primarily due to sales deleverage, somewhat offset by lower non-cash stock-based compensation expenses.

Restaurant level operating margin was 6.8%, down a substantial 2070 bps from 27.5% in the year-ago period. The decline was primarily due to lower sales, and higher-than-usual marketing and promotional costs, and food testing and waste costs.


Chipotle expects combined marketing and promo expenses to comprise about 3–4% of sales over the next few quarters, mainly due to higher advertising expenses.

For 2016, the company anticipates total stock-based compensation in G&A of about $60 million, while G&A will be just over $300 million. This indicates an increase from last year’s level, owing to the opening of new restaurants by the company and the biennial all-manager conference scheduled for September.

For 2016, the company expects 220–235 new restaurant openings.

Currently, Chipotle carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked stocks in the same industry include Darden Restaurants, Inc. DRI, Dave & Buster's Entertainment, Inc. PLAY and Carrols Restaurant Group, Inc. TAST. All these stocks sport a Zacks Rank #1 (Strong Buy).

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CHIPOTLE MEXICN (CMG): Free Stock Analysis Report
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