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Queso might not be enough to stabilize Chipotle's margins, analysts warn

Key Points
  • RBC and Wedbush analysts discussed Chipotle margins before the fast casual chain reveals its third quarter results Tuesday.
  • Chipotle introduced queso to its menu last month to win back customer loyalty, but analysts say execution is too weak to drive traffic long term.
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Chipotle Mexican Grill might have made a big splash with its queso dipping sauce debut last month, but industry analysts are not convinced the cheesy condiment will help stabilize the fast-casual chain's margins.

RBC Capital Markets' David Palmer and Wedbush's Nick Setyan may not have agreed on their top picks for stocks this season, but the two were simpatico when discussing Denver-based Chipotle on CNBC's "Power Lunch" on Monday.

The chain unveiled its queso last month in a strategic move to win back customers after a spate of food borne illnesses, leadership scandals and legal struggles sent even loyal fans running for the hills. The execution was lacking, however, according to Palmer.

"The early feedback has been mixed from the consumer," he said on Power Lunch. "Social media postings have been negative to mixed."

Some experts say the company's high profile and history with food safety issues opens it up to broader scrutiny, especially on social media.

Still, the queso has drummed up interest and boosted business. Setyan noted that the dip boosted Chipotle's run rate by about 3 to 5 percent, although that short-term boost should not be interpreted as a measure of the company's strength.

"I don't see this being a medium or a long-term driver. I continue to think margins are going to be under pressure," Setyan said. "If you can't build sales, whether through queso or some other measures, the margin profile is something much, much, much lower than what current expectations imply."

The idea might have worked out better as a major business driver for Chipotle, Palmer said, if the execution had been better.

"Unfortunately, it feels like this is something that could be reformulated in the future or just be a miss, but what a great opportunity this could be to broaden the user base if they executed it well," he said.