Sometimes when a stock gets beaten down, investors think it becomes a value play. They feel as though they can pick up some shares on discount, ride the stock back up, and sell out of their position, making a nice profit along the way. Some investors feel this way about Chipotle.
Chipotle (NYSE: CMG) was the darling of Wall Street in the casual dining sector. With a share price over $700, investors were banking on phenomenal growth. But then some unfortunate events happened and the stock price tumbled.
Currently, Chipotle is trading for less than $300 per share. Based on the $700 share price, the current stock price looks like a steal. You might be tempted to buy in and make a quick return on your investment.
But you shouldn’t. This stock is toxic and it isn’t getting back to $700 per share any time soon. In fact, it might never get back to $300 per share.
In this post, I’ll share with you the issues with Chipotle and why this stock should be avoided at all costs.
What Went Wrong For Chipotle
Prior to 2015, everything was running smoothly for Chipotle. They were growing same store sales, increasing their customer base, and killing it on the revenue side.
But late in 2015, there was an E. Coli outbreak and a norovirus outbreak at some of its restaurants. It took a few months for the company to figure out the source of the issue and to set in place new procedures so a similar outbreak never happens again. But the damage was done.
The stock dropped by 60% because of this issue.
Customers stopped eating at the chain as they didn’t trust the safety of the food. In fact, before the outbreak, a surveyed showed close to 70% of respondents view Chipotle in a positive light. Immediately after the outbreak, that number dropped to less than 50%.
The Struggles Continue
It’s been two years since the outbreak and Chipotle is still struggling. What are the reasons for this? There are many, but here are the highlights:
- The customers that fled Chipotle have not come back
- Customer perception is still as bad as right after the virus outbreak
- Higher operating costs
The biggest issue that the company is facing is that they cannot get customers back in the door. Those who left the chain after the virus outbreak found other casual dining options instead. And this is a continued problem for Chipotle.
The casual dining sector is fierce with competition. In my local area, there are new restaurants popping up all of the time. You have one shot to make a customer a repeat customer. Many times, these chains fail to do this. As a result, the consumer moves on to another restaurant.
In addition to the loss of customer base, the other issue for Chipotle is higher operating and advertising costs. With higher costs, margins are squeezed and the company earns less money overall.
The Turnaround Plan
I will give some credit to management as they have been active in trying to turn the situation around. The unfortunate news is that nothing they are doing seems to be working.
They have instituted new policies and procedures to make the experience better at their stores, but the results have been a lot slower than hoped for.
For example, in their recent earnings release, earnings per share missed estimates by $0.17 and revenues missed by $10 million. While revenues were up 9%, 2016 was such a horrible year for the stock, they could have easily seen an increase in revenues regardless of the number.
They also have started to play with the menu, as many experts have recommended. The first item they introduced is a queso dip. Some like it and some hate it. But the issue they face here is that sales of the queso dip could cannibalize the sales of their guacamole dip.
Why You Should Avoid Chipotle Stock
So here are the reasons why you should avoid this stock.
- The company is having a difficult time bringing back customers
- 3 year revenue growth for the company is 3% versus 8% for the industry
- Continued increase in operating and advertising costs
- Slowing the plan to add new stores
At the end of the day, investors traded this stock up based on the future expectations. They saw amazing potential in this stock. But the future is now cloudy and the price to earnings ratio is still at 53. This tells me the stock has a lot more downside risk to it and I would not be an investor.
I love to eat at Chipotle. I go there a few times a month. But being a customer and being an investor are two different things. As a customer, the food is served quickly and it tastes great.
But as an investor, I see warning signs everywhere I look. And at the end of the day, the reason I would avoid this stock is simple. Why pay a premium for a stock going nowhere and whose future is uncertain when I can pay a lot less for a company who is growing revenues and has a solid future?
There are many options in this crowded spaced and Chipotle is not one that stands out.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.