Chipotle Safety Concerns Continue To Hurt Comps In Q2

Chipotle CMG released its Q2 results on Thursday after the closing bell. Earnings and revenue came in below Wall Street consensus expectations sending into a volatile aftermarket session as investors analyzed a mixed earnings report.

Missing Estimates

Chipotle reported adjusted earnings per share of $0.87 and revenues of $998.4 million. Restaurant sales comparables were down 23.60 percent and restaurant transactions decreased 19.3 percent. Ahead of the report analyst's had a consensus earnings per share of $0.93 and sales estimates of $1.05 billion. Net income was $25.6 million, a large drop from $140.2 million. Restaurant level operating margin was down a significant 15.5 percent in the quarter, a decrease from 28.0 percent year-over-year. "The decrease was primarily driven by unfavorable sales leverage, and to a lesser extent by higher marketing and promotional costs" according to management. "We returned to profitability, and saw a modest improvement in comp sales trends in the second quarter. Our most recent marketing efforts, led by our Chiptopia frequency program, are off to a nice start in the third quarter, as customers are embracing the program and nearly 30% of all transactions are engaged in Chiptopia" stated management.

Recovering Customer Trust

The company has focused on restoring customer trust over the past quartes and the company launched Chiptopia as one way to do that. "While it has only been a few weeks since Chiptopia launched, we are pleased to see that July sales comp trends have already improved by 200 to 300 basis points, and transaction comp trends have improved by an even greater amount," said Steve Ells, founder, chairman and co-CEO of Chipotle.

CLSA's Double Upgrade

On Tuesday CLSA analysts upgraded Chipotle from Underperform to Outperform. Upgrading the company two rungs up the rating ladder is not common displaying the analyst's confidence that Chipotle would perform well post its earnings report. To CLSA's surprise, Chipotle significantly missed both revenue and earnings per share estimates. Diane Geissler, CLSA analyst covering Chipotle, was ranked among the better analyst's covering Chipotle with an 82 percent success rate and a 10.0 percent average return per recommendation.