Skift Take
The profits are the best news Chipotle has had in weeks and should allow it to focus publicly on non-health disasters.
— Jason Clampet
Chipotle Mexican Grill Inc.’s profit gains — boosted by higher menu prices and lower costs — are helping soothe investor concerns about the burrito chain’s latest health scare.
The Denver-based company posted earnings that easily beat analysts’ estimates in the second quarter, sending the shares up as much as 4.7 percent in late trading. Operating margins at its restaurants soared, a sign Chipotle is getting a payoff from higher prices and efforts to keep a lid on labor expenses.
The results brought relief to investors after a week when the company suffered a norovirus outbreak in Virginia and mice were discovered at a Texas restaurant. Those headlines sent the shares spiraling to their lowest level in more than four years. They also renewed fears that the chain can’t seem to put a 2015 health scare in its rearview mirror.
“We saw encouraging signs in our improved financial results during the first half of the year,” Chief Executive Officer Steve Ells said in a statement. “Recent events, however, have shown that we still have a lot of opportunity to improve our operations and deliver the outstanding experience that our customers expect.”
The stock climbed as high as $365.04 in extended trading. It had dropped 7.6 percent this year through Tuesday’s close.
Chipotle, once a high-flying restaurant-industry darling, was hit with an E. coli outbreak in 2015 that sent its sales and stock price plummeting. In response, the company updated its safety protocols and boosted its marketing. But Ells remains under pressure to mount a sustained comeback.
Deja Vu
Investors got deja vu of the health crisis last week, when Chipotle temporarily closed a restaurant in Sterling, Virginia, following a suspected norovirus outbreak. More than 135 customers fell ill after visiting the location, according to local health-department officials.
Chipotle saw a negative sales impact of about 5.5 percent in the immediate aftermath of the incident, the company said on Tuesday. But it doesn’t expect the health scare to affect its longer-term guidance.
Adding to Chipotle’s woes, video of mice in a Dallas restaurant were shared online last week. The incidents contributed to seven straight days of stock declines for the company.
The Virginia incident stemmed from store management not following updated protocols, Ells said on a conference call.
“We believe somebody was working while sick,” he said. Ells, 51, apologized to customers who fell ill.
The company also acknowledged that it needed to refocus on the operations of its restaurants.
“We need to do a much, much better job,” Ells said.
Ackman’s Tweet
Last week’s negative publicity led Chipotle’s biggest investor, Bill Ackman, to visit a Chipotle in a show of support. The billionaire, whose firm owns about 10 percent of the burrito chain, tweeted a picture of him in line at the restaurant.
Eating our own cooking @ChipotleTweets and making my own mix at https://t.co/CiNtycYWhP pic.twitter.com/rYad7uKuI3
— Bill Ackman (@BillAckman) July 19, 2017
The second-quarter results don’t reflect the latest incidents, since the period ended June 30. But they brought optimism to the beleaguered chain. Earnings rose to $2.32 a share last quarter, topping the $2.18 estimated by analysts.
Same-store sales also jumped, though they were a bit below Wall Street estimates. They climbed 8.1 percent, compared with a Consensus Metrix projection of 9.5 percent.
Chipotle also has a new tactic for attracting customer: a drive-thru window. The chain plans to test the concept in Ohio.
It’s also expanding a test of queso, a menu item many customers have requested. The melted-cheese dish could be added to Chipotle’s menu nationally in September.
Labor savings and a decrease in promotions have helped fuel profit this year, Chipotle said. Its restaurant-level operating margin rose to 18.3 percent in the first six months of the 2017, compared with 11.6 percent a year earlier.
That follows a stretch where Chipotle suffered from relatively high labor spending, said Michael Halen, an analyst at Bloomberg Intelligence.
“They finally got religion on the labor costs,” he said.
©2017 Bloomberg L.P.
This article was written by Craig Giammona from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to [email protected].
