Wall Street badly wants to believe in Chipotle Mexican Grill (CMG), again.
The problem is that the company did not give the market enough positive catalysts to digest on its earnings call to regain the trust of the bulls. It certainly had the opportunity to do so, but failed on several fronts.
1. New Food Launch: Chipotle has historically not added items to its menu. In its view, adding more items in the same vein as a McDonald's (MCD) or a Burger King will slow down lines and not provide a ton of incremental benefit to the top and bottom lines. Also, Chipotle's founder Steve Ells hates traditional fast-food purveyors, and doesn't want his baby mentioned in the same sentence as former parent company the Golden Arches. But the company is slowly starting to soften its stance on the menu front, as it seeks ways to attract back loyal customers and excite new visitors who are hooked on other fast-casual concepts with better menus -- Panera Bread (PNRA), for example.
The company will move forward with the slow rollout of its chorizo sausage product, after successful testing, which occurred before the company's' food-safety stumbles. The product was well-received, according to the company (I heard this back then, as well). I also got the sense that the company will move forward with a new craft beverage menu, which it launched in its home Denver market in late March. Doing so makes all sorts of sense.
That said, I continue to be disappointed by Chipotle's hesitation in taking bigger risks on its menu. The company needs bold right now, and it is not venturing down such a path. I think Chipotle has to finally get into breakfast in order to add a day-menu that could meaningfully drive sales. The breakfast category is competitive, sure, but nobody in the fast-food space is doing anything to match the top-quality-ingredient options that Chipotle has pushed for dinner. If you are reading this Chipotle (and I suspect you are), get into breakfast -- complemented with a nice side of Mexican-themed coffee beverages. Then market the heck out of it.
In short, as an investor, you would want to see Chipotle preparing to do something transformational in its restaurants that could materially lift sales in 2017 (which would lead to estimate raises by the Street). Chipotle hasn't done this yet, so buying the stock here remains a tough sell.
2. New Promotional Efforts: Chipotle is pulling back on discounted product offerings, instead switching to buy-one-get-one-free offerings. I think this is the wrong approach. Couponing badly hurt Chipotle's bottom line in the first quarter. But handing out coupons for free food began to drive traffic back into the restaurants. Chipotle should be blanketing the U.S. with more free-food offerings in what has historically been the start of its busier months.
The old way of doing things is dead (buy-one-get-one offers). Chipotle has to stay aggressive on discounts in an attempt to hook customers again. Moreover, I am not particularly excited about the company's half-hearted attempt at a loyalty program. Details on it were scant, but Chipotle said it will look to reward its most-frequent members this summer. Loyalty programs at Starbucks (SBUX), Dunkin' Brands (DNKN) and Papa John's (PZZA) have transformed their financial statements. I have no idea why Chipotle is not looking at a splashy new digital loyalty program instead of some form of stopgap measure. As I have noted in the past, I think this boils down to the lack of depth in Chipotle's management team: The company is badly behind Panera, Starbucks and Dunkin' in digital, which seems odd, to me.
3. Raw Inspiration: I kept waiting on the earnings call for Chipotle to say that same-store sales trends in late March and into April were down by just a low-single-digit percentage. Alas, that didn't happen: Comp sales continue to be down by a high-double-digit percentage due to weak traffic. This is very alarming, and underscores why Chipotle has to continue sending out offers for free food as opposed to transitioning to buy-one-get-one offers. People are saying they don't care about Chipotle's food anymore -- it's up to the company to make them care once more. In short, Chipotle didn't inspire me with the commentary on its financials.
Chipotle remains a work in progress. If you are inclined to play the restaurant space, consider Starbucks on weakness -- it is the anti-Chipotle play, at present. On a positive note, Chipotle didn't try and defend its highly flawed Board structure on the earnings call after being attacked by a group representing shareholders. I think that signals changes are coming for Chipotle's Board, which are long overdue.