Please ensure Javascript is enabled for purposes of website accessibility

Chipotle Hopes Its $31 Million Gamble Pays Off

By Rick Munarriz - Apr 25, 2016 at 5:15PM

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 troubled burrito roller hopes that its first quarterly loss as a public company tomorrow will be worth it.

We've been scrolling through some unfortunate firsts in Chipotle Mexican Grill (CMG 1.75%) history these days. The fourth quarter was the first time that the former fast-casual darling posted a year-over-year decline in sales, and by tomorrow, we'll be able to check a quarterly deficit off of a pessimistic investor's bucket list for Chipotle.

This isn't a matter of bearish analyst opinion. Chipotle itself told investors to brace for a loss of $1.00 -- or roughly $31 million -- when it reports financial results shortly after tomorrow's market close. 

One can argue that Chipotle wouldn't be in the red if it ran a franchisee-driven concept like so many other players in the quick-service space. It would be collecting a steady trickle of royalties with franchisees bearing most of the burden for the recent plunge in popularity. Then again, being a company-owned operator will make it that much sweeter when the turnaround comes. 

Chipotle would've probably posted a loss for the first quarter anyway, but it didn't do its short-term metrics any favors by tackling the fallout of last year's E. coli and norovirus outbreaks aggressively. It didn't have to reformulate its prep process, close down its restaurants during an entire lunch shift in February to retrain its staff, and rattle off a series of promotions for free or nearly free food. These were all investments in owning up to the brand-tarnishing gastrointestinal issues that ravaged the chain, and now it's time to see if doing the right thing was, in fact, the right thing.

The quarter itself will be ugly. Everyone knows that, and with at least three analysts downgrading Chipotle stock last month, we know where market sentiment rests. It's not a surprise to find the stock trading 11% near its 52-week low and a whopping 42% off of its 52-week high. 

The biggest thing that will drive the stock in Tuesday's after-hours trading is the update on how comps have been holding up since mid-March. We know that everything has been hideous until then, and that all that will bleed over into a chunky deficit with horrendous margins. Giveaways don't come cheap.

If it can score enough points by spinning its "food with integrity" mantra into a "crisis with integrity" battlecry, it will become evident in comps for the latter half of March and as far into April as Chipotle is willing to discuss.

We know that the online promotions and direct mail coupons are stirring interest in getting folks to return to Chipotle. A Cowen & Co. survey showed that folks who have received the promotional offers have visited the chain more often and have a more favorable opinion of Chipotle. Could it just be that diehard Chipotle fans are the ones more actively looking for ways to score a discounted burrito? That may be the case, but if it gets lines forming again, it's OK for Chipotle to try to manufacture its own luck.

Even bullish analysts don't see Chipotle returning to 2015's peak performance levels until 2018, but any signs that the negative comps are starting to narrow in recent weeks could turn that sentiment around. Chipotle has always had a lot to prove every quarter as a result of its lofty market valuation, but now it has even more to prove after throwing every promotional trick in the book at the problem.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,288.77 (1.75%) $22.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
322%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

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