Chipotle Is a Hot Mess as Wall Street Remains Confused
Wall Street seems completely confused on how to assess Chipotle's (CMG) - Get Report prospects.
But analysts do appear to have found common ground on some things ahead of the embattled burrito seller's second-quarter earnings release on Thursday evening.
The first is that Chipotle's same-store sales trend likely continued to lag as many once-loyal customers are still visiting less frequently in the wake of the high-profile food safety incidents last year.
Most of the analyst previews of Chipotle's results reviewed by TheStreet anticipate that same-store sales fell about 20% in the second quarter, despite the company's stepped-up marketing efforts and more promotional stance on its food. Although that type of performance would be tough to stomach, it would mark an improvement from the first-quarter sales plunge of 29.7%. In the first three weeks of the second quarter, Chipotle said on its late-April call with analysts, same-store sales were down 22%.
Another area of agreement seems to be that sales trends so far in the third quarter are down, but are better than the second quarter.
Helping Chipotle right now, according to analysts, is interest in the newly introduced chorizo and the launch of a loyalty program for customers called "Chiptopia."
Outside of those factors, general confusion remains on what's ahead for Chipotle and how its stock will respond.
The sense of bewilderment is on display in Chipotle's stock price. Shares of Chipotle have lost roughly 5.8% since its April 26 first-quarter earnings release. The S&P 500 has roared to all-time highs during that span. Year to date, Chipotle shares are down 13% compared to a 6.3% gain for the S&P 500.
TheStreet looks at the latest analyst research on Chipotle.
New chorizo will likely help sales in the third quarter, says Wall Street.
Firm: William Blair
Analyst: Sharon Zackfia
Rating: Outperform
Says Zackfia wrote, "In our monthly survey of 800 adults, food safety concerns at Chipotle (which we have found to be inversely correlated with comparable store sales) hit the lowest level yet, with a particularly notable improvement in the Northeast (although the West Coast remains challenging)."
That sure sounds positive for Chipotle, no? But then Zackfia drops these serious concerns.
"However, the percent of customers indicating they are eating less frequently at Chipotle remains high at roughly 45%, and the percent of rejecters (prior customers who have not eaten at Chipotle since the outbreak) is roughly 26% (although down from peak levels near 30%).
Despite a host of other concerns in the report, Zackfia ends things on an upbeat note.
"While we understand investors have been frustrated by the slower pace of recovery in the second quarter, we are optimistic that July could mark a turning point toward a faster pace of traffic improvement -- ultimately, we continue to believe that much of Chipotle's sales and margins can be recovered."
Wall Street thinks Chipotle is seeing the return of some once loyal customers, but not all.
Firm: Credit Suisse
Analyst: Jason West
Rating: Outperform
West tweaked his second-quarter same-store sales estimate for Chipotle to a decline of 20% from a drop of 22% previously. For July, he sees same-store sales declining by 19%.
A more positive sales trend, more positive days ahead for Chipotle's weary investors? Not exactly, suggests West.
"While these sales forecasts are a notable improvement from a 30% same-store sales decline in the first quarter, Chipotle's sales recovery seems to have stalled out in recent months," wrote West. "We believe this is due to sluggish consumer spending overall, negative headlines related to the indictment of Chipotle's Chief Marketing Officer on June 30, a tweet on July 7 suggesting that someone had gotten sick from eating at a Manhattan location and likely limited impact from the new rewards program which appears somewhat confusing and clumsy."
West then switched to optimism, writing, "That said, as the calendar turns to summer, Chipotle's stores are starting to feel busy again, and we remain of the view that the brand will gradually recover from the late 2015 food safety issues."
The best thing for Chipotle founder Steve Ells to do with analysts Thursday? Be brutally transparent.
Firm: BTIG
Analyst: Peter Saleh
Rating: Neutral
These were perhaps the most straightforward earnings preview notes on Chipotle. But BTIG's note, too, was laced with a sense of bewilderment.
Saleh wrote, "While we continue to believe that Chipotle will recover its lost sales from the food safety issues last fall, we remain uncertain of the timing and promotional activity that may be required."
Fair enough. Then Saleh injected some hope into the equation. "Our channel checks suggest a sequential traffic improvement throughout the quarter, with June being the strongest month -- we believe new initiatives such as the launch of chorizo and the limited-time loyalty program Chiptopia could contribute to same-store sales in the second half of the year but still expect a gradual sales recovery."
Saleh wrapped things up on a downbeat note. "We continue to expect that comparable-store sales will remain negative for at least the next two quarters, and remain on the sidelines until we see a stronger traffic improvement and greater certainty about a sustained sales recovery."