Please ensure Javascript is enabled for purposes of website accessibility

Why Chipotle Mexican Grill, Inc. Dropped 15% in October

By Joe Tenebruso – Nov 11, 2016 at 4:47PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The struggling restaurant chain's recovery from last year's food crisis is taking longer than many investors had hoped.

Image source: The Motley Fool.

What happened

Shares of Chipotle Mexican Grill (CMG -0.51%) fell 15% last month, according to data provided by S&P Global Market Intelligence. The former Wall Street darling continues to struggle with declining sales as it attempts to recover from the lingering aftermath of multiple food safety incidents that tarnished the fast-casual chain's reputation for high-quality fare.

So what

Chipotle's comparable-restaurant sales plunged 21.9% in the third quarter, leading to a 14.8% drop in revenue. That marked the fourth straight quarter of double-digit declines in comp growth for the beleaguered restaurant chain.

Analysts who previously expected Chipotle's sales to rebound sooner are now predicting that it could take years for the burrito shop's sales to fully recover, with a recent Morgan Stanley survey showing that roughly 25% of Chipotle's customers have reduced their visits -- or stopped going altogether -- even six months after the last reported food safety incident.

Worse still, Chipotle announced that it would be abandoning its expansion plans for its ShopHouse Asian concept, which was once seen as a promising long-term growth driver for the company. Additionally, whereas ShopHouse was believed to be operating in a somewhat differentiated niche, Chipotle said that it would focus its future efforts on concepts based on pizza and burgers -- two areas with intense competition, leading to skepticism regarding Chipotle's ability to compete successfully in these markets.

Now what

Chipotle is using a host of strategies to entice customers to return to its restaurants, including a TV advertising campaign, new menu items, and even free food. While management is optimistic that these measures will help Chipotle's sales rebound in 2017, some analysts believe the company's aggressive promotions could cheapen its brand and dent margins.

To offset these negative pressures on its profitability, Chipotle has developed a lower-cost restaurant design that it believes will help to preserve its industry-leading restaurant-level economics. But if customers don't return to Chipotle's stores, slashing costs won't be enough.

Still, optimists believe Chipotle will ultimately prevail. Even as many bears are betting against the stock, respected activist investor Bill Ackman recently took a large stake in the company. Combined with outcome of the election -- which many investors believe could result in an easing of employee benefit cost inflation and a greater possibility of lower taxes -- seems to have stabilized Chipotle's share price, with the stock rising about 10% so far in November. And if management's efforts to stabilize its same-store sales take hold, this move could be the beginning of a far larger rebound in Chipotle's stock price in the years ahead.

Joe Tenebruso 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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.