Chipotle Mexican Grill (NYSE:CMG) could be gearing up for a long-awaited push into burgers through a new concept that could launch later this quarter. Foodie blog Eater is hearing that Chipotle could open its first TastyMade -- a name with a trademark application that was filed two months ago with the address of the chain's legal team and with social media handles secured -- in Central Ohio as early as this summer.
It may not seem like such a big deal. Chipotle already has two other small concepts in the Asian-themed ShopHouse and Pizzeria Locale, which offers flash-baked pizzas. However, sometimes there is more to a strategic move than meets the rib eye. Let's go over a few of the reasons why a new burger concept should matter to investors of the out-of-favor burrito roller.
1. If comps don't turn positive by Q4 we need a distraction
Chipotle's store-level sales turned negative in November as reports of foodborne illnesses began to surface, and the chain's been suffering through double-digit percentage declines ever since. Comps slipped 14.6% during last year's holiday quarter, and it would have been a lot worse if it didn't have the benefit of a positive showing in October before the Chipotle hit the fan. Comparable-restaurant sales plunged 29.7%. during this year's first quarter.
The silver lining within this brutal run is that it will be that much easier to get back on track once the unit-level comparisons start to get easier later this year, but it will take some time for comps to get back to where they used to be. Comps would have to rise 17.1% in the fourth quarter and a whopping 42.2% during next year's first quarter to get unit-level production to where it was two years earlier. Yes, it's a lot harder to claw your way out of a hole than it is to fall into it.
No one is expecting those beefy gains to happen, but it would be a real surprise if comps weren't at least positive. If it doesn't turn around in the fourth quarter it would be rough, but if comps still aren't positive by the first quarter of next year it could be very painful for Chipotle investors.
That's where TastyMade comes in. If the first one opens this summer in the Lancaster area of Ohio -- as Eater is reporting -- and it's generating positive buzz, it could be a welcome distraction if Chipotle comps are still negative by the fourth quarter or not showing healthy gains come early next year. The market may be less likely to sell off Chipotle if it knows that the chain's fourth concept has legs.
2. The summer of Chiptopia needs an autumn escape hatch
Chipotle is hoping that Chiptopia -- the frequent-dining program that will reward repeat customers with free food through the end of September -- will drum up traffic without squeezing margins too hard. That's fine, but what if Chipotle threw a loyalty rewards program party and nobody came?
If Chiptopia fails to spark at least an uptick in transactions it could bum investors out. Comps during the third quarter last year were already starting to prove mortal, rising a mere 2.6% for the chain's weakest showing in years at that point.
The possible failure of Chiptopia as an aggressive promotional tool would disappoint investors. It would suggest that the road to recovery will be a long one if discounting isn't enough. This, again, is where the TastyMade distraction could fit in nicely. If the third quarter offers another period of sharply declining sales a hot "better burger" concept could ease the sting.
3. It will be easier to grow TastyMade than ShopHouse or Pizzeria Locale
ShopHouse is now up to 15 locations. Its Asian kitchen spin is bold, but it has taken five years to get this far. Pizzeria Locale has just five pie shops with another two opening soon. Investors were initially hoping that this would be the Chipotle of pizza, but others have run away with that crown. There are several more prominent fast-casual pizza joints these days.
Blaze and MOD have more than 100 eateries in the wild. Pie Five and Pieology are almost there. This brings us to TastyMade. If the first unit is a hit out of the gate it's hard to see Chipotle operating just 15 of them five years from now. This is mainstream food, and Chipotle's resources can help it scale quickly.
Chipotle is going to have the overhang of last year's E. coli and salmonella outbreaks for some time. The stock took a hit last week just because author Eric Van Lustbader tweeted that his editor got sick at Chipotle. He went on to delete the tweet -- and apologized -- but everyone's going to assume that if someone contracts a foodborne illness that Chipotle is somehow the only thing they've eaten for the past few weeks. That's not the case.
Apologies for tweeting about a private incident. Not what tweeting is all about, at least in my view. Lesson learned.— Eric Van Lustbader (@EVanLustbader) July 8, 2016
A fast-growing TastyMade can help. Chipotle should bounce back. Time heals. However, if it doesn't it needs to have a hot concept to take the baton and move the needle. ShopHouse is growing too slowly, and Pizzeria Locale missed the window of opportunity. There's a lot riding on TastyMade now, as scary as it seems that we have so much riding on trademark filings and conjecture.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.