- Some analysts claim Chipotle can never get back to its glory days.
- New unit openings are supporting declining comps for now.
- There's just one key number you should watch out for in this earnings release.
Chipotle Mexican Grill (NYSE:CMG) will be reporting its third quarter results on October 25th after markets close, and there's one key number you should be watching. The battered and bruised restaurant chain has lost nearly half of its value since August 2015, as the company suffered a nightmarish E.Coli invasion on its brand. Chipotle was obviously the restaurant story of our decade, and there was a point when Chipotle started being compared with McDonalds (NYSE:MCD) simply due to the fact that the company was able to keep expanding its store footprint while also increasing average sales per store.
But the growth story came to an abrupt stop after food safety issues started flowing out of Chipotle's restaurants. It has been more than a year and the company is still having trouble containing the fallout. Clearly, all eyes will be on one single number, Chipotle's same store sales numbers. If the company wants to show the market that it is ready to put the past behind it, the only way to do it is to show that footfalls are increasing across its stores.
Wall Street is expecting the company to report earnings per share of $1.59 with $1.09 billion in revenues when the company reports its third quarter numbers. It is the last three quarters of dropping same store sales that have hurt the company the most.
Comparable store sales declined by 29.7% in the first quarter and 23.6% in the second quarter. The good news for the second quarter was that the pace of decline came down instead of accelerating further. If Chipotle can show that it has further reduced the decline, then it will do a world of good for the company as well for its stock price.
New Stores - the Biggest Support for Declining Comps
Chipotle is still actively opening new stores, and the company is targeting an addition of 220-235 restaurants during the current fiscal. By the end of second quarter, the company was on target towards that goal, having opened 114 new restaurants.
Chipotle has indeed created some trust issues for its loyal user base, and there are several analysts arguing that Chipotle will never earn that back. It is indeed a huge issue, and one that might slow things down for them in the long run. Chipotle was not the first company to go through the E.Coli fiasco, and it won't be the first company to come out of it either.
It will take time, and third quarter results are not going to allow them to resume their growth story. It will take several more quarters for Chipotle to get its sales growth numbers back on track, and until such time, new restaurant additions will be extremely important as it will provide a major buffer to the slowdown in comparable sales numbers.
The stock has lost more than 15% of its value since the start of the year, and 42% in the last twelve months. The last two quarterly results did nothing to improve investor sentiment, as the stock price kept declining through the year. Though the pace of decline seems to have come down in the last three months, Chipotle has to first start trading in a tight range before breaking out. If same store sales numbers improve and Chipotle meets or beats expectations during the third quarter, we can expect a sideways movement after a brief pop following the results, and it will be the best way to restart things for Chipotle.
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