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Chipotle Banking on Strategic Steps to Regain Lost Ground
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On Mar 27, we issued an updated research report on quick-casual and fresh Mexican food restaurant chains operator, Chipotle Mexican Grill, Inc. (CMG - Free Report) .
Chipotle is one of the most recognized fast-casual Mexican restaurant chains in the U.S. However, the company’s results in the past few quarters continued to be affected by the negative publicity related to the food-borne illnesses that surfaced toward 2015-end, despite various food-safety initiatives.
In fact, as a safety measure the fast casual chain was forced to close several outlets. Although these were reopened later with fresh ingredients and extensive cleaning and sanitizing activities, the incidents dealt a severe blow to Chipotle’s sales. Since then, the company’s earnings and revenues came under tremendous pressure. Also, comps witnessed a decline of 20.4% in full-year 2016.
Turnaround Efforts
Notably, Chipotle is leaving no stone unturned to reinvigorate investors’ confidence and regain its footing. In this regard, its board of directors recently discarded the co-CEO model and made Steve Ells the company’s sole Chief Executive Officer (CEO) in order to deal with the ongoing challenges in a better way. Ells particularly aims to focus on simplifying restaurant operations so as to offer better service and healthier food to attract customers.
Further, the company added four new members to rejuvenate its board. In addition, Chipotle aspires to strengthen its brand and recover sales by shifting its strategy from giveaways, discounts and rewards to new menu items, simplification of restaurant operations, enhancement of guest experience, better operations including faster throughput and more aggressive brand marketing.
Also, the company is moving insistently to make digital ordering more appealing to its customers and more efficient for its restaurants, in order to drive digital sales.
Meanwhile, improvement in food handling, testing and food preparation procedures remains the company’s top priority. To achieve this, Chipotle has significantly expanded training, food safety inspections and third-party as well as internal audits at its restaurants.
Moreover, in a bid to recover from the massive food safety scandals, the company reportedly closed all 15 of its ShopHouse Southeast Asian Kitchen restaurants, recently. We note that the latest move of shutting down all ShopHouse restaurants bodes well, as the brand failed to be a viable growth strategy for the company.
Headwinds
Nevertheless, Steve Ells qualms over the company’s ability to reach its previously announced guidance of high single digits rise in same-store sales and adjusted earnings per share of $10.00 in 2017, raises concerns.
Additionally, high labor costs along with elevated marketing and promo expenses are expected to hurt margins, while a soft consumer spending environment in the U.S. restaurant space might limit revenue growth.
Also, Chipotle’s market share, particularly in the Mexican cuisine category, is unlikely to increase soon as the company has already reached 60% saturation in the U.S. Also, it is currently facing increased competition from the likes of Yum! Brands, Inc. (YUM - Free Report) owned Taco Bell, Jack in the Box Inc.’s (JACK - Free Report) subsidiary Qdoba and Brinker International Inc.‘s (EAT - Free Report) Chili’s Grill & Bar (Chili’s). This is lowering the brand’s ability to recover and return to its peak levels of 2014, as smoothly and quickly as expected.
Bottom Line
We believe that the new brand-management efforts along with sales-building initiatives would help Chipotle counter the challenges posed by the E. coli and norovirus outbreak.
In fact, the company’s efforts have already started bearing fruit as reflected by positive estimate revisions. Over the last 60 days, current quarter earnings estimates have moved up 1.6%.
Furthermore, Chipotle shares have outperformed the Zacks categorized Retail–Restaurants industry over the past three months. The stock returned 7.3%, as against the industry’s loss of 1.7%, clearly reflecting that the company is indeed on the road to recovery.
Still, we believe, it will take some time for the company to completely restore its economic model as well as customers’ trust and return to its former glory.
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Chipotle Banking on Strategic Steps to Regain Lost Ground
On Mar 27, we issued an updated research report on quick-casual and fresh Mexican food restaurant chains operator, Chipotle Mexican Grill, Inc. (CMG - Free Report) .
Chipotle is one of the most recognized fast-casual Mexican restaurant chains in the U.S. However, the company’s results in the past few quarters continued to be affected by the negative publicity related to the food-borne illnesses that surfaced toward 2015-end, despite various food-safety initiatives.
In fact, as a safety measure the fast casual chain was forced to close several outlets. Although these were reopened later with fresh ingredients and extensive cleaning and sanitizing activities, the incidents dealt a severe blow to Chipotle’s sales. Since then, the company’s earnings and revenues came under tremendous pressure. Also, comps witnessed a decline of 20.4% in full-year 2016.
Turnaround Efforts
Notably, Chipotle is leaving no stone unturned to reinvigorate investors’ confidence and regain its footing. In this regard, its board of directors recently discarded the co-CEO model and made Steve Ells the company’s sole Chief Executive Officer (CEO) in order to deal with the ongoing challenges in a better way. Ells particularly aims to focus on simplifying restaurant operations so as to offer better service and healthier food to attract customers.
Further, the company added four new members to rejuvenate its board. In addition, Chipotle aspires to strengthen its brand and recover sales by shifting its strategy from giveaways, discounts and rewards to new menu items, simplification of restaurant operations, enhancement of guest experience, better operations including faster throughput and more aggressive brand marketing.
Also, the company is moving insistently to make digital ordering more appealing to its customers and more efficient for its restaurants, in order to drive digital sales.
Meanwhile, improvement in food handling, testing and food preparation procedures remains the company’s top priority. To achieve this, Chipotle has significantly expanded training, food safety inspections and third-party as well as internal audits at its restaurants.
Moreover, in a bid to recover from the massive food safety scandals, the company reportedly closed all 15 of its ShopHouse Southeast Asian Kitchen restaurants, recently. We note that the latest move of shutting down all ShopHouse restaurants bodes well, as the brand failed to be a viable growth strategy for the company.
Headwinds
Nevertheless, Steve Ells qualms over the company’s ability to reach its previously announced guidance of high single digits rise in same-store sales and adjusted earnings per share of $10.00 in 2017, raises concerns.
Additionally, high labor costs along with elevated marketing and promo expenses are expected to hurt margins, while a soft consumer spending environment in the U.S. restaurant space might limit revenue growth.
Also, Chipotle’s market share, particularly in the Mexican cuisine category, is unlikely to increase soon as the company has already reached 60% saturation in the U.S. Also, it is currently facing increased competition from the likes of Yum! Brands, Inc. (YUM - Free Report) owned Taco Bell, Jack in the Box Inc.’s (JACK - Free Report) subsidiary Qdoba and Brinker International Inc.‘s (EAT - Free Report) Chili’s Grill & Bar (Chili’s). This is lowering the brand’s ability to recover and return to its peak levels of 2014, as smoothly and quickly as expected.
Bottom Line
We believe that the new brand-management efforts along with sales-building initiatives would help Chipotle counter the challenges posed by the E. coli and norovirus outbreak.
In fact, the company’s efforts have already started bearing fruit as reflected by positive estimate revisions. Over the last 60 days, current quarter earnings estimates have moved up 1.6%.
Furthermore, Chipotle shares have outperformed the Zacks categorized Retail–Restaurants industry over the past three months. The stock returned 7.3%, as against the industry’s loss of 1.7%, clearly reflecting that the company is indeed on the road to recovery.
Still, we believe, it will take some time for the company to completely restore its economic model as well as customers’ trust and return to its former glory.
Chipotle currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2017? Who wouldn't? Last year's market-beating Top 10 portfolio produced 5 double-digit winners. For example, oil and natural gas giant Pioneer Natural Resources and First Republic Bank racked up stellar gains of +44.9% and +44.3% respectively. Now a brand-new list for 2017 has been hand-picked from 4,400 companies covered by the Zacks Rank. See the 2017 Top 10 right now>>