Chipotle (CMG): Will Food-Safety Practices Improve Sales?

On Aug 26, we issued an updated research report on quick-casual and fresh Mexican food restaurant chains operator, Chipotle Mexican Grill, Inc. (NYSE:CMG) .

The company posted lower-than-expected second quarter results on Jul 21, with both earnings and revenues missing the Zacks Consensus Estimate.

Food-Safety Issues & Other Risks

Chipotle continues to reel under negative publicity related to the E. coli and norovirus outbreak since end-2015. As a safety measure, the fast casual chain was forced to close several outlets. Although these were reopened later with fresh ingredients and extensive cleaning and sanitizing activities, the incidents dealt a severe blow to Chipotle’s sales.

Also, recently, Chipotle lost the tag of the most popular Mexican restaurant owing to food-safety issues and increased competition, which is likely to hurt traffic. Thus, given the negative publicity related to these food-borne illnesses, Chipotle’s popularity among health-conscious diners is likely to decline further. The company hence expects both earnings and revenues to remain under pressure in the near term.

Moreover, Chipotle intends to roll out a number of marketing and promotional initiatives to bring back customers to its stores and the costs associated with these will continue to impact profitability. Also, implementation of food safety practices has increased the amount of labor required to prepare and serve food, resulting in higher labor costs which may further continue to keep profits under pressure.

Turnaround Efforts

Nonetheless, the company’s efforts to maintain its market position through expansion plans coupled with various sales and technology driven initiatives bode well.

Notably, Chipotle is leaving no stone unturned to lure back customers to its restaurants. The company has undertaken an inclusive assessment of its food safety programs and practices to ensure the quality and safety of food.

Chipotle is also focusing on developing new food safety protocols and emphasizing on internal training programs to make sure that its employees are aware of the company’s standards for food safety and handling.

Meanwhile, the company’s aggressive unit expansion strategy is expected to accelerate same-store sales. With the resurgence in consumer confidence, management has accelerated unit openings and expects unit growth in the range of 220 to 235 outlets in 2016.

Moreover, launch of Chiptopia Summer Rewards program and menu innovation by offering chorizo should further aid the company in gaining back customers.

Stocks to Consider

Chipotle currently has a Zacks Rank #3 (Hold). Better-ranked stocks in this sector include Papa John's International Inc. (NASDAQ:PZZA) , Del Taco Restaurants, Inc. (NASDAQ:TACO) and Restaurant Brands International Inc. (NYSE:QSR) . All the three stocks carry a Zacks Rank #2 (Buy).

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CHIPOTLE MEXICN (CMG): Free Stock Analysis Report

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