Is Chipotle Mexican Grill, Inc.'s Sales Recovery on Track?

After a year of posting horrendous sales declines, Chipotle Mexican Grill (CMG -0.43%) has finally pulled out of its dive. On Tuesday, the fast-casual chain reported that comparable restaurant sales returned to growth in December.

In fact, comp sales surged nearly 15% year over year last month, thanks to an easy prior-year comparison. (Chipotle was mired in its food safety crisis in December 2015.) However, it isn't clear yet whether the company has returned to sustainable comp sales growth.

Comparisons get easier and comp sales rise

Up until October 2015, Chipotle had posted consistent comparable restaurant sales growth for many years. However, Chipotle's E. coli outbreak became a full-blown food safety crisis in November 2015, with comp sales declines bottoming out at 36.4% in January 2016.

Chipotle faced steep sales declines during late 2015 and most of 2016. Image source: The Motley Fool.

Since then, Chipotle's sales trajectory has improved slowly but steadily. However, sales are still nowhere near the levels achieved during the first 10 months of 2015. Indeed, as recently as Q3, Chipotle reported a 21.9% year-over-year comp sales decline.

Over the course of the fourth quarter, Chipotle went from facing a fairly tough year-over-year comparison in October to an extremely easy comparison in December. As a result, while comp sales fell 20.2% year over year in October, Chipotle's comp sales rose 14.7% last month. (November was in between, with a 1.4% comp sales decline.)

Is the underlying trend improving?

Given the abrupt change in Chipotle's sales trend in the fall of 2015, the sudden return to strong comp sales growth last month is not as impressive as it looks. For the full fourth quarter, comp sales sank 4.8%, which was more than 1 percentage point worse than the average analyst estimate. Chipotle also had to cut its earnings outlook dramatically.

A better way to evaluate its sales performance is to look at two-year comparisons. Comparing Chipotle's recent results to its results two years ago provides a better indication of whether the company's sales performance is actually improving.

Chipotle Mexican Grill two-year stack comparable sales trend:

Data source: Chipotle Q3 earnings report and Chipotle Jan. 10, 2017 8-K filing.

Chipotle's compounded two-year comparable restaurant sales change improved modestly in October relative to the Q3 average (down 19.2% compared to down 19.9%). It improved again in November to down 17.1% before reversing course in December with a 19.7% decline.

There are two ways to interpret this data. One possibility is that Chipotle's sales recovery has stalled. While Chipotle posted double-digit comp sales growth last month, on a two-year basis its comp sales trend was in line with its performance over the summer.

On the other hand, it's possible that the December results were an outlier. Severe weather can have a meaningful impact on sales during the winter months, creating "noise" in the data that could hide an underlying trend. The only way to know for sure is to see how Chipotle's 2017 sales trajectory develops.

Still the early innings of this turnaround

While Chipotle Mexican Grill has returned to comp sales growth, it is still years away from making a full recovery. 2017 will be a critical year, as Chipotle founder Steve Ells -- who became sole CEO again last month -- starts to implement his turnaround plan.

Company founder Steve Ells hopes to lead a turnaround at Chipotle. Image source: The Motley Fool.

Ells plans to streamline Chipotle's operations in order to maximize efficiency. Management also aims to encourage more digital ordering, which should reduce costs and enable faster throughput.

These initiatives -- along with menu innovation and the healing effects of time -- have the potential to drive a full sales recovery at Chipotle over the next few years. However, realizing this potential will take a lot of hard work, and it's too early to be confident that Chipotle's turnaround effort will succeed.