Restaurants

Chipotle shares tank after company admits it will need to spend more to woo customers

Key Points
  • Chiptole warned investors that it plans on spending more on marketing and promotions as it works to win back diners
  • The company said that it expects same-store sales to still be in the high single digits.
  • Analysts foresee trouble in the near-term for the brand, but long-term Chipotle may be able to recover.
Daniel Acker | Bloomberg | Getty Images

Nearly two years after a string of food safety incidents, Chipotle Mexican Grill still isn't on solid ground.

The beleaguered burrito chain warned investors in a Securities and Exchange Commission filing on Monday that it plans on spending more on marketing and promotions as it works to win back diners and foresees expenses rising as much as 0.3 percent.

The company said that it expects same-store sales to still be in the high-single digits, but that didn't seem to quell investors' concerns. Shares of Chipotle fell more than 6.9 percent, marking it as the worst performer in the S&P 500 so far on Tuesday. The stock is having its worst selloff of the year.

"We remain Neutral on shares of Chipotle as we believe the sales and unit economic recovery ought to be further along 18 months after the initial food safety incidents," Peter Saleh, an analyst at BTIG, wrote in a research note Monday.

In the first quarter, the burrito chain saw same-store sales rise almost 18 percent, the first increase in more than a year for the company. Chipotle execs said the rebound was a result of more customers returning to the restaurant and spending more during their visit.

However, the company was lapping easy comparisons as same-store sales a year ago were down almost 30 percent. Chipotle will continue to have easy comparisons throughout the year.

Saleh retained his forecast of same-store sales growth of 9.5 percent. However, he warned he has been tracking weak sales in the West Coast and Northeast, which could drag on Chipotle's performance.

However, he lowered his second-quarter earnings per share estimate to $2.12 from $2.44 based on the guidance provided by Chipotle's management, which suggested that food and operating costs would be higher than BTIG had initially expected.

Nomura-Instinet analyst Mark Kalinowski also slashed his full-year EPS estimates for the stock to $8.30 from $8.75 and cut his price target $30 to $480 from $510.

Some analysts were more optimistic. Piper Jaffray's Nicole Miller Regan maintained her $530 target price on the stock. She said that Chipotle's recovery is a matter of "when" not "if."

"Our latest checks largely reflect the consensus view that Chipotle trends have largely turned the corner and are now on the mend," Miller Regan wrote in a research note Monday. "Although still early, initial indications suggest new television advertising has helped to drive awareness and that the new bunuelos dessert item has been received favorably."

Chipotle embarked on a new ad campaign in April, which includes national TV commercials. Using the tagline "As real as it gets," the campaign focuses on the quality of Chipotle's ingredients.

Baird analyst David Tarantino, too, is optimistic about Chipotle's future. He said that Chipotle's management team has a "good game plan" for the future and that the brand will be able to recover from a series of E. coli, Salmonella and norovirus outbreaks that plagued its chains in 2015.

Tarantino lowered his second-quarter EPS estimates to $2.01 from $2.44, noting that in the near-term Chipotle still has work to do. He said that ultimately investors will be rewarded for owning the stock, but that he needs to "gain more conviction" that the company can boost same-store sales and provide strong earnings before he can offer a "more constructive investment recommendation."

Chipotle is expected to report second-quarter earnings in late July.