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Chipotle loyalty program offers investors something to chew on

Chipotle workers fill orders for customers at a restaurant in Miami.
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Chipotle workers fill orders for customers at a restaurant in Miami.

Chipotle Mexican Grill swung back to profitability in the second quarter, but the earnings weren't enough to outpace analyst expectations.

Chipotle shares initially rose on the report, perhaps buoyed up by "modest" improvements in traffic, fueled by the company's Chiptopia loyalty program.

But those gains came at a price, and Chipotle shares reversed.

"We returned to profitability, and saw a modest improvement in comp sales trends in the second quarter," Steve Ells, founder, chairman and co-CEO of Chipotle, said in a statement. "Our most recent marketing efforts, led by our Chiptopia frequency program, are off to a nice start in the third quarter, as customers are embracing the program and nearly 30 percent of all transactions are engaged in Chiptopia."

The CEO noted that July sales had improved by 200 to 300 basis points because of the loyalty program, which has attracted more than 3.6 million participants.

The company saw a 90 percent increase in foot traffic among customers who eat at the chain two and a half times or more per week in July when compared to June.

The results raise the question of whether the loyalty program is wooing customers back in the restaurant or simply rewarding customers who already are frequent visitors.

While the Chiptopia loyalty program is slated to end on September 30, the company noted in a conference call on Thursday that it will be launching another loyalty program. However, it has not determined if that program will be a temporary or permanent part of the chain's operations.

Ells also said that of chorizo has accounted for 6 to 7 percent of entree sales for the restaurant since it launched in late June.

"The best thing that we can do for our business is to earn customers' trust and loyalty by consistently providing a terrific restaurant experience with safe, delicious food and excellent service," Monty Moran, co-CEO of the burrito chain, said in a statement.

The company posted earnings of 87 cents per share on $988 million in revenue. Analysts expected the burrito chain to post earnings of 93 cents a share on $1.05 billion in revenue, according to a consensus estimate from Thomson Reuters.

Chipotle's same-store sales declined 26.5 percent, a deeper drop than the 20.4 percent Wall Street estimated, according to FactSet. However, transactions fell 19 percent during the quarter, suggesting that much of the sales gains were due to the strong promotions.

Chipotle also saw its food costs as a percentage of sales rise 110 basis points to 34.2 percent — another headwind for the company.

"Success for us is getting all the sales back," the company said. "Now the time frame, we can't predict what that is. We are frustrated that we are not further along."

Last week, two analyst surveys suggested that the Mexican food chain is still struggling to lure customers back after several food safety issues.

Morgan Stanley surveyed 2,000 customers, of whom 720 ate at Chipotle, in mid- to late-June. The results of the survey suggest 13 percent of those polled say they still won't go back to the chain. That's only a modest decline from January, when an earlier poll was taken by the firm.

What's more, even among the customers who have ventured back to Chipotle, 13 percent said they opt for the restaurant less often. That means 25 percent of those surveyed say they have either stopped going to Chipotle or have reduced their frequency, Morgan Stanley said.

Another survey, conducted by William Blair, showed consumers are more willing to eat at the chain, with concerns about food safety reaching an all-time low in 2016. The firm has conducted monthly surveys of about 800 adults since November 2015, when the E. coli outbreak and food-safety concerns were impacting restaurant traffic.

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