Here's the Next Disappointment Chipotle May Serve Investors

Chipotle will likely open fewer new restaurants in 2017 as it attempts to regain the trust of consumers.
By Brian Sozzi ,

Never been to Chipotle (CMG) - Get Report as there isn't one close by? Yearning to finally try the burrito bowl that everyone on Instagram has seemed to love for years?

Well, you may have to wait until 2018 for the burrito chain to come to a your town as it re-thinks the pace of new store openings -- and where new locations are positioned -- due to to a persistent battle with dreadful sales following several food safety incidents last year. 

"We've refocused our real estate team on assessing future openings with a more conservative lens that takes into account our current economic model, particularly given recent changes to our average unit volumes," Chipotle co-CEO Monty Moran told analysts on a call Thursday evening fresh off reporting another stunning quarterly sales decline.

Moran declined to say precisely how many new restaurants Chipotle would open in 2017. But, a source close to the matter said Chipotle was looking at opening fewer locations in unproven new U.S. markets next year, and instead will focus development in existing markets where performance is more predictable.  

In the wake of it trying to regain confidence among consumers in the safety of its food, it has been locations in brand new markets -- where consumers never became infatuated with the the company's food during the height of its popularity -- that appears to be giving Chipotle the most trouble.

"In the new markets and developing markets, in those markets there has been, I think, even more softening of sales than there has been nationally -- so the delta between a new store opening in a developing or new market has been slightly greater than when compared to the rest of our restaurant average daily sales," conceded Moran on an April 26 earnings call. Judging by his comments Thursday, the performance at newer locations didn't improve much in the second-quarter. 

Chipotle will likely slow the pace of new restaurant openings in 2017.

Chipotle's aggressive expansion through the years has been a key component to Wall Street's love affair with its stock. Over the past three years alone, the number of Chipotle locations in the U.S. has gone from about 1,400 in 2012 to now over 2,100. This year, the company plans to add a mind-numbing 220 to 235 new restaurants.

According to the source, if Chipotle reduces new openings to around 200 next year, the Street will unlikely be happy. "Optically it won't look good," said the source. Meanwhile, opening new locations in existing markets comes with a major longer term risk: cannibalization, or stealing sales from popular locations. "Opening more stores in existing markets would limit their opportunity to get back to full sales volume [pre-food safety incidents]," the source explained.  

Clearly, Chipotle opting to downshift new store openings to fourth gear from warp overdrive makes sense in light of the new financial realities showing up in its business. The company reported Thursday that earnings nosedived 80% from the prior year to 87 cents a share. Wall Street estimated earnings of 93 cents a share. Revenue fell 16.6% to $998.4 million, missing Wall Street's estimate for $1.05 billion. Same-store sales plunged 23.6% in the quarter, and are down about 21% so far in July. 

"Aggressive growth plans and unit openings are best suited for expanding on a hot brand that has the consumer's attention in a good way," explained Technomic Advisory Group Senior Principal David Henkes, adding, "While the second-quarter sales declines weren't as bad as the first quarter, it's pretty clear that senior management has their hands full fixing the core business. It's tough to build excitement for a new restaurant opening when the current business is declining at what's still an alarming rate."

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