Chipotle Posted Catastrophic Numbers; Guidance is Even Worse

Chipotle is losing money and rapidly decelerating in terms of sales and margins. Comps are down 29% and the company has resorted to giving away burritos to increase foot traffic. The lunacy of it all lies in the decisions put forth by management. They intend to open 220-235 new restaurants in 2016, effectively leveraging a broken model.

The stock is down 4.5% in the after-hours, continuing a harrowing decline that began when the company started to poison people with their food several month’s ago.

These numbers are much worse than anyone had expected. Shareholders should expect scathing reports tomorrow morning and significant pressure on shares throughout 2016. In my opinion, CMG doesn’t deserve any premium valuation and should fall in value down to $250.

Via Briefing.com

• Reports Q1 (Mar) loss of $0.88 per share, $0.17 better than the Capital IQ Consensus of ($1.05); revenues fell 23.4% year/year to $834.5 mln vs the $863.24 mln Capital IQ Consensus.
• Warned on March 15: Lowered EPS to ($1.00) or worse from break even; updated comps through 2nd week of March.
  • The decrease in revenue was driven by a 29.7% decrease in comparable restaurant sales (estimates near down 28.5%), partially offset by sales from new restaurant openings. Comparable restaurant sales declined primarily as a result of a decrease in the number of transactions in our restaurants, and to a lesser extent by a decline in average check, including an impact from sales promotions.
• Comparable restaurant sales decreased 29.7%, Comparable restaurant transactions decreased 21.1%.
• Restaurant level operating margin was 6.8%, a decrease from 27.5%. The decrease was primarily driven by unfavorable sales leverage, and to a lesser extent by higher than usual marketing and promotional costs, and food testing and waste costs.
• For 2016, management expects the following:
  • 220 – 235 new restaurant openings
  • An effective full year tax rate of approximately 38.4%

• CMG says that it began to see some recovery in comps in the second half of the first quarter. In January, comps were running at about -34%. It improved to about -22% in the first few weeks of April, with Easter adding about 4%. Wet, cold weather also negatively affected comps in early April.
• The company says the recovery has been uneven throughout the country. The west coast and northeast for example — where the health concerns were most acute — have struggled the most. In these geographies, it has only recovered about a third of visits.
• The company believes that consumer perceptions are improving, based on in-depth research work done. That said, it still needs to see improvements in certain areas. For instance, customer admiration has slipped to 61% from 70%. Likely to revisit is at 43%. These are up from earlier, but, still not where CMG wants to see them.
• In regards to marketing, it is implementing its largest marketing program through the end of June. Throughout the year, the company plans to be more aggressive with marketing (possible buy one, get one promo), and will launch a new limited time frequency program this summer. Also, it will add new menu items to invite customers back.
• Its free burrito program this past winter was very successful, with a 67% redemption rate on the mobile offer. This helped provide a boost to comps.
• In terms of expansion, the company still sees a very significant opportunity past this year.
• CMG says it is not prepared to give EPS guidance for Q2, saying that it is really dependent on sales. At comps stay at current levels, going to be difficult to deliver a healthier EPS. CMG gives an example that if comps stay at current levels, restaurant level margins should improve to low double digits.
• Shares of CMG are trading about 6% lower in after hours.