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Will 2017 Bring Better Days for Chipotle Mexican Grill?

By Motley Fool Staff – Nov 10, 2016 at 3:12PM

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The ShopHouse Southeast Asian Kitchen was originally touted as a promising source of revenue growth for the company, but the 15-location chain will be retired. What can investors look forward to in the coming year?

The Industry Focus: Consumer Goods cast wraps up its coverage of Chipotle Mexican Grill (CMG 1.10%) with a discussion of the recently tabled ShopHouse Southeast Asian Kitchen prototype restaurants. The company needs to experiment with new sources of revenue to regain its growth momentum, but a look to the future is more encouraging for this company than you may think.

A full transcript follows the video.

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Vincent Shen: In terms of the most recent earnings that came out last week, with the stock trading down double digits since then, some of you were probably very disappointed in the continued double-digit declines for overall revenue, comparable sales, foot traffic, operating margins are at half the prior-year levels. Asit, you had touched on those. I think the 95% decline in income was probably particularly painful for a lot of shareholders. But there's a lot of potential here as well in what Chipotle is adopting, what they're pursuing. You mentioned some of the rising costs with labor, food, food disposal, and waste. But I think they announced about $100 million in cost-cutting measures. Also, something else that had investors concerned was they're ending their ShopHouse Kitchen concept. I think there's 15 locations in three markets. They failed to gain traction. A big proponent of growth that investors believed Chipotle offered was the fact that they could take the success of the flagship chain and apply it to new concepts. Still, the company still has their pizza and their new burger concepts to pursue. I think, for 2017 in general, the company has a much more positive outlook in terms of comparable sales, the restaurant-level operating margins should recover quite well, and they'll just have better comparisons overall as the company laps some of its lows from early 2016.

One more thing touching on the data -- one more quote from Mr. Crumpacker. He said, "For example, using the data, we now know that during the last six months, we saw nearly 30 million new customers at Chipotle. These new customers are customers we have not seen since the food safety events of last year. In fact, transactions from these customers account for nearly half of all transactions over the last six months. Additionally, we know how many of these customers returned to Chipotle for additional visits, and how many of them became regular customers." I think that kind of information -- and, that 30 million number is very encouraging. Overall, despite some of the negative reception from the earnings, Chipotle is in an improving position, absolutely, following their troubles in this year.

Asit Sharma: Yeah, I am of the same mind. Really briefly, you know how you look at a stock chart that's spread out five years, and you kick yourself for selling a stock when it was down, or maybe you bought it when it was low priced and now it has gone up a lot and you've sold it, the same phenomenon is occurring here with Chipotle. It's very hard to see, with the trees right in front of us, how many good things are going on in terms of better operations, in terms of the data that we've been talking about in this episode that they are definitely mining, the new customers. But all these factors will combine over the longer term, and they will come out of this with stronger revenue. And I believe that margins will recover. 

I want to make one last point, too, about the ShopHouse concept. I was sort of disappointed, too. But look at it from management's perspective. I remember management said, a couple years ago in a conference call, that for them, when a field manager walks into a ShopHouse kitchen, he or she does not see the ShopHouse. He or she sees a Chipotle. So, it's a matter of finding the right concept and then expanding that one. Investors don't want Chipotle to throw good money after bad. If they find a concept isn't getting traction, as you said, shelve it. There are a number of other concepts in the fast-casual space that they can put their operational model to.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. 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.

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