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Chipotle's terrible quarter comes with litany of reasons why

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Avocado prices shot up. Hurricanes forced restaurants to close. The bill for a hacker attack came in.

Those were reasons Chipotle Mexican Grill cited to explain its huge profit shortfall in the third quarter -- just a few of the troubles on a long list. The burrito chain was also hit with a norovirus outbreak in Virginia and a public-relations nightmare when customers complained about rodents falling from a ceiling at a restaurant in Texas.

In short, it was a three-month stretch in which seemingly everything that could go wrong did. Executives made the case that the quarter of unfortunate events was an aberration, nothing indicative of foundational disarray. But investors who've been watching Chipotle work on its rocky comeback from the depths of the E. coli disaster in 2015 were skeptical: They sent the shares down as much as 15 percent, their worst intraday plunge in five years.

"There is a sense that Chipotle's rebirth is running out of steam," Neil Saunders, managing director of GlobalData Retail, said in a note. "A number of factors have conspired in making this a somber quarter for the company."

Profit amounted to 69 cents a share, net of expenses tied to the data-security breach earlier this year and hurricanes Harvey and Irma. Analysts had estimated about $1.63 a share, according to data compiled by Bloomberg.

The Denver-based company has been reeling since a wide-ranging food-safety crisis sickened hundreds, crushing its sales, profit and stock price. The chain had started to recover in the past year, but then the norovirus incident in Virginia -- along with a video of the mice at a Dallas location -- sparked a fresh round of negative headlines.

Chief Executive Officer Steve Ells acknowledged that the latest results weren't what he hoped for but said he believes the company's revival is still on course.

"We're embracing the things we need to reach our full potential," Ells said in an interview. "From a structure standpoint -- and a feeling internally -- the teams are ready."

Investors may need a lot more convincing. Chipotle shares fell to $277 on Wednesday, tumbling to their lowest intraday price since January 2013. The stock had already slipped 14 percent to $324.30 this year through Tuesday.

"There were a lot of unusual items in the quarter," Chief Financial Officer Jack Hartung said. The one-time expenses added up to $1.05 a share, and they weren't telegraphed to Wall Street.

"They don't really know what to do -- and they're not doing a good job communicating," said Michael Halen, an analyst at Bloomberg Intelligence.

The company had 425 restaurants in the direct path of the storms, and four of those locations are still closed. The hurricanes cost the chain nearly $10 million: about 6 million in lost revenue and $3.3 million in expenses, including hourly wages for idle workers, repairs and donations to charity, Hartung said.

Higher avocado prices also hurt results, he said.

But even ignoring the one-time setbacks, the numbers were a bit worse than analysts had projected. Same-store sales grew 1 percent, missing the 1.2 percent estimate. Total revenue came in at $1.13 billion, short of the $1.14 billion projection.

The company expects same-store sales to gain 6.5 percent this year. That's below the 7.2 percent estimate compiled by Consensus Metrix.

One bright spot was the rollout of queso last quarter. Sales gained 4 percent after the item was added to menus nationwide in September, Hartung said.

Chipotle executives have been banking on queso to help the chain regain its allure. On the previous earnings call in July, company officials mentioned the new product roughly two dozen times. The cheese dip is the centerpiece of Chipotle's attempts to win back customers with advertising.

The company has said that customers have requested queso for years. It's typically made with processed cheese, but Chipotle created a recipe that was designed to meet its natural-food standards.

Some customers have complained on social media that the consistency is grainy. The criticism led Chief Marketing Officer Mark Crumpacker to implore employees to ignore the outcry in a companywide memo last month.

The data breach, meanwhile, struck Chipotle's payment systems in the spring. The company warned investors about the problem in April and said in May that it had successfully removed malicious software from its systems. And in the third quarter it took a charge: $30 million, a 64-cent hit to earning per share.

The chain also has been reining in its growth ambitions. It's now looking to open slightly fewer locations this year than the low end of its previous range of 195 to 210. And management expects to add a smaller number of restaurants in 2018.

"The company has lost quite a lot of the momentum it built over the past six months," GlobalData Retail's Saunders said.

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