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Chipotle sales plummet 22%

Nicole Sinclair
Markets Correspondent
Source: Getty Images

Chipotle (CMG), which has fallen from darling status after an E. coli and norovirus food-safety crisis last year, reported ugly third-quarter results after the bell on Tuesday.

The all-important comparable store sales (which looks at the sales of Chipotle locations open at least one year) declined 21.9% compared to expectations for a decline of 18%. This compares to last quarter’s 23.6% decline. Over the last nine months, comparable restaurant sales decreased 24.9%.

For the fourth quarter, the company sees comparable restaurant sales declines in the low single-digits versus estimates for declines of 0.5%.

Earnings per share of $0.56 came in well below expectations of $1.62 and versus $4.59 last year. Revenue came in at $1.04 billion versus estimates for $1.09 billion.

Restaurant level operating margin was 14.1% in the third quarter, a decrease from 28.3% in the third quarter of 2015.

To attract more customers, the company  has been rolling out new initiatives. Over the summer, it launched a rewards program—Chiptopia. However, bears continue to suggest that last year’s food-safety crisis may have done permanent damage to Chipotle. Earlier this month, the company announced a shift back to a straight buy-one-get-one (BOGO) offer, tied to the release of its promotional short film, “A Love Story.” Maxim’s Stephen Anderson said this could be a sign that earlier promotions weren’t getting the traction expected.

The stock has suffered in 2016, down 15% going into the earnings report, but did get a spike in early September when Bill Ackman’s Pershing Square disclosed a 9.9% stake in the stock. However, the activist still has not made his plans for Chipotle known.

E. coli hangover

Anderson says that Chipotle remains under pressure as competition from other chains has heated up.

“CMG’s traditional strongholds in central business districts and college towns are seeing competition from the ‘better-for-you’ fast casual sub-segment,” he said. Panera (PNRA) in particular is making a push for “clean” food along with smaller, private chains. Panera surged after its strong report Tuesday.

But Chipotle’s co-CEO Steve Ells said that trends have improved, courtesy of company efforts.

“We continued to make steady progress in our sales recovery during the third quarter,” he said in the press release. “We are earning back our customers’ trust, and our research demonstrates that people are feeling better about our brand, and the quality of our food.”

Co-CEO Monty Moran emphasized the company’s focus on winning back customers.

“After successfully implementing an industry leading food-safety program, and as our marketing efforts are driving more people to our restaurants, it is critical that we are prepared to delight customers on every visit. We are confident that we have the leadership and teams in place to do just that,”  Moran said the release.

But the company has relied on costly promotions to draw in customers who may be wary of eating there in the wake of last year’s E. coli outbreaks.

And costs have been higher as a result of increased food-safety compliance. Earlier this year, management said increased costs for more rigorous food-safety protocols would deduct at least 150 bps on an annualized basis.

Meanwhile, the company does have higher exposure than peers to $15-per-hour wage mandates, and it will be subject to accelerated wage increases in at least 25% of the company’s US restaurants in the next three to five years, according to analysts. 

While some of the most extreme food safety risks remain in the rear view mirror, analysts say that potential legal risks remain.

One potential longer-lasting upside catalyst in the coming quarters is the roll out of chorizo, a spicy chicken and pork sausage blend. Chipotle management plans to introduce chorizo nationwide in the fourth quarter but already has incorporated it as a permanent menu item in some markets, including Manhattan, San Diego, Sacramento and Columbus. On the third-quarter conference call, management also discussed testing dessert options and enhancing its digital ordering platform.

The bottom line: While other chains — like Yum’s (YUM) Taco Bell and Jack in the Box (JACK) —  recovered from disease outbreaks within a year, Chipotle’s recovery has gone much more slowly, so far. The company has continued to reiterate its plans to open 220 to 235 restaurants in 2016.

Nicole Sinclair is markets correspondent for Yahoo Finance. 

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