Chipotle shares crater on downgrade, more trouble ahead for brand

  • Chipotle Mexican Grill said Tuesday it expects traffic will continue to decline through the middle of the year.
  • Stifel analyst Chris O'Cull downgraded the stock to sell from hold, lowering his price target to $250 from $310.
  • Chipotle said that it expects same-store sales in 2018 to rise at a low single-digit pace.

Shares of Chipotle Mexican Grill shed more than 10 percent Wednesday as analysts foresee more trouble ahead for the burrito chain.

Chipotle is on pace for its worst day since Oct. 25, following a number of stock downgrades and price cuts after the company posted fourth-quarter earnings on Tuesday that were only slightly better than expectations.

The company said that an increase in the average check helped bolster earnings despite slowing foot traffic. Chipotle said it expects traffic will continue to decline through the middle of the year.

"We expect negative traffic to persist," Stifel analyst Chris O'Cull wrote in a research note Tuesday. "The company seems to be relying on easier comparisons this summer, rather than any initiatives to reverse the trend. We believe improving traffic could prove especially difficult following the 5 percent menu price increase."

O'Cull downgraded the stock to sell from hold, lowering his price target to $250 from $310. Bank of America cut its price target to $270 from $285 and Morgan Stanley slashed its price target to $312 from $346. The lowest of those price targets implies Chipotle shares could sink more than 8 percent from their current value.

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

The company said it expects same-store sales in 2018 to rise at a low single-digit pace, an outlook that was "more bleak than anticipated," according to O'Cull.

Chipotle said higher menu prices, which it began to institute last April, helped boost ticket averages and sales in the quarter. Chipotle initiated the final wave of these hikes in January, bumping up prices by 5 to 7 percent in markets that did not already see increases in 2017.

"The company is taking considerable price in the middle of a value war in QSR," Jeremy Scott, a Mizuho analyst, wrote in a research note Wednesday. "While the company has had to absorb labor inflation over the past three years without much alleviation from pricing action, the timing of this hike is less than ideal."

Chipotle has struggled to regain customer confidence since a series of foodborne illness outbreaks caused diners to flee the restaurant chain two years ago. On Tuesday, the company said it was aware of these issues and was making strides to revitalize its reputation.

CEO Steve Ells said the company would be focusing on operational changes, digital innovation and restaurant renovations to enhance guest experience. The company plans to spend $45 million to retrofit second make-lines into existing and new restaurants, $50 million to upgrade interiors and exteriors of stores and $15 million to improve its IT infrastructure to help support its digital programs.

BTIG analyst Peter Saleh maintained his neutral rating on Chipotle as he expects the company will continue to struggle to gain traffic "until more bold changes are enacted."

"We view the investments planned for the coming year, a year shaping up to be one of reinvestment, as largely defensive and cosmetic rather than transformational," he wrote in a note to investors. "We believe a material change in strategy is necessary for a more significant recovery but don't believe that is imminent given the ongoing CEO search."

Ells is set to step down from his position as chief executive as soon as the company finds a suitable successor. On Tuesday, Ells said Chipotle is "making good progress" in its search.

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