There were plenty of reasons to brace for a rough third quarter at Chipotle Mexican Grill (NYSE:CMG), and that's just what investors got on Tuesday afternoon. Between another food-borne illness outbreak early in the quarter and the market's chilly reaction to the queso rollout during the tail end of the period, there's a reason why at least seven analysts slashed their price targets on the shares last week. Wall Street was skittish, and it was the right call.
The rough performance sent Chipotle stock down to another four-year low on Wednesday, and it's easy to wonder if the shares will ever revisit their all-time peak of $758.61 set two summers ago. Anything is possible, but Chipotle doesn't seem likely to establish new all-time highs in the next couple years. Let's go over a few of the reasons why it's going to be a long road back for the out-of-favor burrito roller.
1. Queso isn't a magical elixir
Chipotle feels that queso is a hit. It claims that 93% of those who have tried the all-natural proxy to the goopy cheese sauce rivals have been ladling out for years -- when poured over a Chipotle entree -- like it, a far cry from social media's reaction and possibly even your own anecdotal evidence. Is it really just a very vocal minority dissing the rollout? Let's assume that Chipotle's right, and you, like me, are just a seven-percenter. There is still a problem.
The chain claims that queso is attracting new customers and it's bringing regulars back more often. If that's the case it's probably disappointing to find Chipotle saying that comps rose just 1% for the period, and would've actually been flat if not for last year's revenue deferral related to its Chiptopia summertime loyalty promotion. The good news is that comps during the final three weeks of the quarter -- when queso was introduced -- rose 4%. The bad news is that Chipotle finds that 15% of its customers are paying up for queso.
The problem with that 15% metric is that queso tacks on another buck and change to your order and more than that if you order a dipping cup of queso. Let's say that those 15% are paying 15% more for their orders. That would explain a little more than half of the 4% uptick in same-store sales. If queso is bringing in new customers and making regulars come back more often, how can traffic -- all things being held equal outside of the queso spike -- be only up 2%?
More to the point, Chipotle's full-year guidance suggests that comps will be flattish during the fourth quarter. Thanks for nothing, queso.
2. Chipotle isn't anywhere near a turnaround
If you fall 22 steps down to a basement and take one step back up, you're not upstairs -- you're in the basement.
I'll get back to what that means in a moment. Comps fell 21.9% during last year's third quarter. It rose just 1% this time around. It's not even 5% of the way back from where it was two years ago, and that's with queso and two years of menu price hikes. Where was I? Oh, right.
If you fall 22 steps down a to basement and take one step back up, you're not upstairs -- you're still in the basement.
3. You can't party like it's 2015 anymore
Chipotle has 400 more restaurants, but the average store is ringing up more than a fifth fewer sales than it was two years ago. It's hard to find another concept where comps have fallen by more than 20% over the past 24 months, but the grim reality is that there's no going back to where it was before.
The marketplace has changed. Fast-casual pizza chains are the new market darlings. The burger giants have roared back into consumer fancy. The popularity of third-party delivery and takeout platforms are giving casual dining dinosaurs a second act. The Chipotle brand has also taken some hits, so it's the perfect storm of everyone else taking a step up with the once cult favorite falling back.
Your local Chipotle chain may never revisit its peak 2015 sales and profit margins, and this has nothing to do with Chipotle trying to make that up in sheer volume of eateries.