Chipotle Mexican Grill: Buy or Sell?

Chipotle Mexican Grill (CMG) announced second quarter ended June 30, 2016 total revenue of $998.4 million, down 16.6 percent year-over-year from $1.20 billion during the same period last year.

Weak performance

Chipotle Mexican Grill declared second quarter of 2016 net income of $25.6 million, or $0.87 per diluted share, down 82 percent year-over-year from $140.2 million, or $4.45 per diluted share in second quarter of 2015.

The global Mexican food restaurants company reported continued year-over-year decline in both its top and bottom lines primarily due to 23.6% decline in comparable sales from the company’s restaurants, somewhat offset by healthy sales from recent openings of new restaurants.
Further, the fall in comparable sales across restaurants is driven by a decline in the transactions count happening across its restaurants coupled with a slight fall in average customer check.

Although, the comparable store sales illustrated continued sales recovery during the initial half of fiscal year 2016 but, comparable restaurant sales recently declined 23.6% mainly due to lesser number of transactions occurring across the restaurants and declining customer footfall in these restaurants somewhat offset by rising sales contribution from latest restaurant introductions.

Chipotle is expected to be continuously witnessing improving customer perception about the healthy foods of the fast-food company during the beginning quarter of fiscal year 2016 from the earlier significant damage done to the company’s reputation through the widespread threat of noro and E.
Chipotle Mexican Grill: Buy or Sell?
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coli viruses. This improving aided consideration is driven by continued solid efforts being undertaken by Chipotle to offer newer varieties of fast foods in addition to rebranding itself as a healthy foods company.

Despite Chipotle continuing to witness a recent decline in customer footfall across its restaurants still, the company seems extremely well-positioned for delivering sustainable long-term growth while offering attractive shareholder returns over the longer term mainly due to sustained improvement in the customer’s perception about Chipotle’s foods.

Steady growth    

Chipotle’s weekly sales are continuing to grow steadily with continued improvement in customer traffic primarily driven by ongoing sales promotional events undertaken by the company to showcase the healthiness of its varied food assortments. The company’s latest marketing initiatives driven by its Chiptopia frequency schedule are proving to be a huge success for the company with increasing number of customers hugely embracing the program and about 30% growth in the total number of transactions is being linked to Chiptopia.

The entire Chipotle management and workforce is keenly focused on regaining the lost customer confidence and restoring customer frequency while rewarding its highly loyal customers through the program. Importantly, sales comp trends for July has already enhanced by about 2% to 3%, and comp trends for transactions have grown by higher amount.

A healthy growth in free entrée transactions was greatly offset by a significant and continued decline in paid entrée transactions and leading to continuously negative total entrée comp during the start of fiscal year 2016.

The ongoing improvement in Chipotle’s customer traffic at its restaurant and healthy growth in unpaid or free entrée transactions signifies that still people are unwilling to pay and consume food at Chipotle. This trend seems to be highly unprofitable and unrewarding for the company and appears harmful for the company over the longer term while needing immediate management’s intervention to reinvent the brand reputation.

Chipotle is expected to be having year-over-year industry-leading returns since the past 5 years from 2010 till 2015.

Conclusion

Overall, the investors are advised to “Hold” their position in Chipotle Mexican Grill, Inc. considering the company’s significant long-term growth prospects with an industry-leading PEG ratio of 10.01 and being supported by a solid financial position with healthy total cash of $270.14 million, encouraging the company to make future growth investments while offering attractive shareholder returns. The profit margin of 5.24% also seems satisfactory.
Published on Sep 9, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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