Chipotle’s (CMG, Financial) third-quarter earnings confirmed the company’s bad times are far from over. One of the biggest expectations I had entering into the third quarter is how far the company would able to arrest the pace of its same-store sales decline. It was during the second half of last year that Chipotle’s food safety issues started. During the third quarter last year, Chipotle’s same-store sales stood at 2.6%, the last time it was in positive territory.
Since the fourth quarter of 2015, comparable-store sales have declined by 14.6%, 29.7% and 19.3%, respectively. As the pace of decline came down during the second quarter, there were heightened expectations that same-store sales would come in with much better numbers during the second half of the year compared to the first half. Wall Street expected Chipotle to report a 18.2% decline in same-store sales during the third quarter. Unfortunately, the company ended up reporting a 21.9% decline.
Though the steep downward trend line has been arrested to a moderate one - as seen in the chart above - the fact that sales are still declining at double-digit rates is further increasing the strain on the company.
"It has not stabilized much," Will Slabaugh, a restaurant analyst with Stephens, said of Chipotle on CNBC's "Closing Bell" on Tuesday. "We've seen it slowly improve, but not at quite the rate where people thought it was going to."
In spite of introducing several freebies, promotions and even a temporary rewards program, Chipotle has been unable to win back customer's trust.
Chipotle’s stock has already lost nearly half of its value from the peak price of around $750 in August of last year. The downward trending stock slide is yet to be arrested and unless the pace of the same-store sales decline stops or slows down significantly, the stock will continue to be under intense pressure.
Chipotle has even been taking the discount route to address the issue of customers not walking back into the store. The company’s summer loyalty program, Chiptopia, was moderately successful, but the problem with this approach is that it ignores the fact that people are not coming back to Chipotle because of food safety concerns, not because the price got out of hand.
Instead of trying to lure customers back into its fold through loyalty programs and ignoring the issues, Chipotle needs to address the food safety concerns head-on. Only then may customers be more receptive. It will be a long, drawn-out process, but one that could deliver long-term results.
After trying so many other methods, Chipotle has finally begun to directly address food safety issues.
“On Sept. 21, the hobbled burrito chain tried a new strategy. It carved out prominent real estate on its website for a food safety section.
Sitting atop the new section is a video featuring Chipotle CEO Steve Ells extolling the virtues of the chain’s food standards to the tinkling backdrop of in-memoriam piano music. Early in the video, Ells acknowledges the 2015 food safety crisis that sickened dozens with norovirus and set sales into a tailspin.” - QZ.com
I think it is a good start, but the company needs to stay on course for the next several quarters. Only then will we be able to see results in the form of increased traffic. Until then, we can safely assume that the stock will continue to track the company’s same-store sales numbers quarter upon quarter.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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