Chiptopia Brings Customers Back, But What About Chipotle's Stock?
It has been almost a month since Chipotle Mexican Grill (CMG) - Get Report launched its Chiptopia rewards program, and already the company is optimistic about its results.
But by no means is this Mexican-inspired fast-casual food retailer out of the woods. Indeed, Thursday's dismal second-quarter earnings announcement had investors running for the exits, though the stock is up by more than 4% on Friday.
Does this present a good opportunity to grab shares at a mega-discount? Or is the stock still rancid?
Chipotle Mexican Grill's food safety troubles have been a disaster for the company and its stock.
Just last summer, the restaurant was the country's most beloved fast-casual eatery, topping even Panera Bread and Shake Shack.
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And investors were piling in, pushing Chipotle Mexican Grill's stock to record highs. At one point last year, Chipotle Mexican Grill was priced at an incredible $750 a share.
Then calamity struck.
In October, customers at locations in 14 different states were sickened from food poisoning from E.coli, and shares dropped. The stock has lost more than half its market value since last fall.
The company attempted to restore customer loyalty with a campaign promising free burritos and gratis guacamole. But first quarter same-store sales plunged by about 30%.
Something more extreme had to be done.
Last month, Chipotle Mexican Grill unveiled Chiptopia, a summer-long customer loyalty program designed to offer freebies to the heartiest burrito eaters.
Under the program, customers in July, August, and September can rack up points for free entrees, according to how many times they buy meals at the restaurants. Sheer volume is rewarded, with repeat diners who order at least 11 entrees during each of the three months for a total of 33 receiving nine additional free entrees, as well as a veritable feast for 20 friends, valued at $240.
Rewards programs have been proving successful for the restaurant industry as a whole, with Dunkin' Brands, Panera Bread and Starbucks all jumping on the bandwagon.
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And since Chiptopia began on July 1, Chipotle Mexican Grill has reportedly seen same-store sales improve by 2 to 3 percentage points.
About 30% of customer orders have been made through the program, according to Founder and co-CEO Steve Ellis.
The company has said that its business model revolves around restoring customers' trust in the brand. But it will be an uphill climb, especially after the earnings release.
Net income clocked in at 87 cents a share, below Wall Street's expectation of 91 cents. And same-store sales cratered again, this time by 23.6%, which was even worse than the 20.6% drop that analysts had expected.
Chipotle Mexican Grill remains optimistic that, given time, it will return to its former success. So is now a good time to get in on this beleaguered stock?
Although the stock may one day return to its heyday, it will take a long time, during which anything could happen.
Bottom line: This stock is still too risky for investors.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.