Chipotle has been stuck in no man's land since the E. coli scare. First-quarter same-store sales fell 29.7%. Second-quarter comps were better, but not by much: comps fell 23.6%. Analysts were looking for a decline of just 20%. Last year comps were up 4.3%.
The company missed on just about every metric. Second-quarter restaurant operating margins fell to 15.5% from 28% last year. Food costs were up 110 basis points to 34.2% of revenue. Earnings were 87 cents per share, 3 cents less than expected. Revenue fell 16.6% to $998.4 million. Investors were looking for revenue of $1.05 billion. The number of transactions fell 19.3%. Marketing and promotional spending was up 200 basis points and it still didn't help very much.
Chipotle launched a customer loyalty program effective July 1 that runs through the end of September. Customers pick up a "Chiptopia" card at a Chipotle and earn credits toward food rewards like a free entrée, depending on the frequency of their visits and total spent.
Chipotle's turnaround efforts hit a snag when Mark Crumpacker, the company's chief creative and development officer and the architect of the company's turnaround plan, was arraigned on charges of possession of cocaine. Crumpacker was indicted after an investigation into Manhattan drug trafficking. The company said Crumpacker is back to work after less than three months on administrative leave.
Despite the difficulties of losing a key executive for most of the quarter, the Chiptopia program had 3.6 million participants. About 30% of all July transactions were done on the card. But judging by the second-quarter results, the impact of the Chiptopia card was relatively modest.
After the dismal second-quarter results, analysts lowered third-quarter estimates. Same-store sales for the quarter are expected to be down anywhere from 15% to 18%. Total revenue is forecast to be down 10% to $1 billion. Earnings of 91 cents per share would be dramatically lower than the $4.59 a share posted last year.
Two weeks ago, activist hedge fund manager Bill Ackman filed a 13-D with the Securities and Exchange Commission and said his firm now holds 2.88 million shares of Chipotle, compromised of 0.55 million common shares and 2.3 million shares held through a forward contract with a brokerage firm. The purchase makes Ackman Chipotle's second-largest shareholder.
Despite the big stock purchase, it's hard to see how Ackman will get the stock higher. Restaurant stocks trade on same-store sales. I'm not entirely sure how he plans to get those higher.
I would avoid shares of Chipotle. Fiscal 2016 sales are expected to be up 14%, which is half last year's growth rate of 26%, despite the company adding 220 to 235 new restaurants in 2016. Earnings are expected to be $2.50 this year, compared to last year's $15.10. Management replenished the share buyback program with $300 million, but that is not going to be enough money to move the stock dramatically higher.
Until management can find a way to drive same-store sales appreciably higher, I would avoid Chipotle.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.