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Chipotle shares drop 15% as investors balk at the recovery time

  • Chipotle shares shed 15 percent as investors balked at Chipotle's recovery.
  • The stock is trending for its worst one-day decline in more than five years.
  • Chipotle posted disappointing third-quarter results Tuesday afternoon and announced plans to slow store growth.

Looks like Chipotle still has a way to go to win back customers — and Wall Street.

After posting disappointing third-quarter results, the Mexican restaurant chain trimmed its outlook for comparable sales, a metric closely monitored by the Street, and scaled back its plans for new store growth.

Chipotle shares fell 15 percent Wednesday afternoon, trending toward their worst decline in more than five years. On Oct. 19, 2012, the stock fell more than 12 percent in one day.

"Despite some sales lift from queso and pricing, we view this result and outlook as disappointing, particularly for those looking for a more meaningful recovery following multiple food safety events," Credit Suisse analyst Jason West wrote in a note to clients.

The recovery for the fast-casual chain, he added, "remains elusive."

Credit Suisse lowered its price target on Chipotle shares to $275, from $320. The stock was trading around $277 on Wednesday morning. West cited the fact that the current restaurant environment is "oversupplied," presenting obstacles should Chipotle want to grow faster in the future, as management has suggested.

To be sure, the Colorado-based restaurant chain has been testing initiatives to lure customers back ever since it faced a slew of foodborne illness outbreaks in 2015. A nationwide rollout of queso in September was anticipated to boost sales. But it wasn't enough to make a strong third quarter.

Meantime, Chipotle's culinary team has hinted at adding new items like margaritas, salads and desserts one day. First, the company said it wants to get the "fundamentals right."

"[The] company is focused on five key areas to turn around the business, but to us these seem like 'table stakes' in this current environment as opposed to reasons for sustained outperformance," JPMorgan analyst John Ivankoe said.

Those areas for Chipotle include bettering the guest experience, restoring brand trust, innovating around the menu and strengthening company culture.

"I know by dedicating ourselves to bringing back operational excellence, we're going to get a lot of customers back," Chief Executive Steve Ells told analysts and investors on Tuesday. "But that's not the only thing we need to do."

"We need to be an innovative company," Ells added. "For the past 24 years, we haven't really been an innovative company."

David E. Tarantino, an analyst with Baird, is calling the third quarter "messy." Baird has also dropped its price target on the stock to $300 a share, from $340.

"While reassured the recent launch of queso has helped to stabilize comps (after weakness in middle of Q3), we still believe structural improvements to core unit-level execution are needed to drive sustainable traffic improvement, and we suspect efforts to strengthen operations could take time to gain traction," Tarantino wrote in a note to clients.

With Wednesday's declines, Chipotle shares are down more than 30 percent over the past 12 months.

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