After aggressively buying back stock for more than six months to take advantage of its low share price, Chipotle Mexican Grill (NYSE:CMG) scaled back its repurchases in the second quarter.
The burrito maker reduced its quarterly buybacks to only $100 million in the three months from April through June. That was one-sixth the amount from the previous quarter, when it repurchased $583 million worth of stock. And it amounted to less than a third of the money Chipotle spent in the fourth quarter of last year, when its buybacks added up to $314 million.
Equally significant is the fact that Chipotle didn't take the opportunity to announce a new buyback authorization when submitting its latest quarterly regulatory filing on July 22. Its board had done so three times this year, adding $300 million to its authorization in each of January and February and $100 million in May.
At present, it can buy back just under $140 million worth of stock, which is roughly what it had left at the end of the first quarter.
Chipotle has been repurchasing stock at an accelerated rate since the end of last year when its share price plummeted following a wave of foodborne illness outbreaks at a number of its locations. After topping out at $750 per share last October, the chain's stock price has since been cut in half.
I've argued along the way that this was a smart move. Virtually every other major popular food chain in the United States has experienced some type of foodborne illness outbreak in the past yet gone on to produce substantial shareholder returns after the dust settles. This includes McDonald's, Yum! Brands, Jack in the Box, and even Costco.
As a result, if Chipotle can take advantage of the temporary slump by buying back shares at a large discount to its previous price, then its long-term shareholders may even end up benefiting from the turbulence of the past year.
But as investors -- myself included -- are now discovering, it takes time for a company to recover from a foodborne illness crisis. This is particularly true when, as was the case with Chipotle, there are multiple outbreaks at multiple locations.
In the latest quarter, months after Chipotle got the all-clear from the Centers for Disease Control and Prevention, its same-store sales were down 23.6%. Though to be fair, that was an improvement over the first quarter when same-store sales were off by nearly 30%.
The implication is that Chipotle may have spent too much too soon on buybacks. Its average repurchase price through the first six months of the year was $461 per share. Meanwhile, its average share price since the middle of June has been 10% below that.
I continue to believe that Chipotle will reclaim its position atop the restaurant industry, which is why I personally own its stock. I also continue to believe that its decision to buy back stock in response to the drop in its share price was smart. It may have been overambitious thus far in doing so, but the rationale for scaling up its repurchases in general seems spot-on to me.