Is Queso The 'Golden Bullet' Chipotle Investors Hoped For?

If Twitter Inc TWTR and Alphabet Inc GOOG GOOGL's YouTube reviews mean anything, Chipotle Mexican Grill, Inc. CMG’s new queso is “trash,” its flavor “chalk” or “dog food,” its consistency “soup.”

So if you thought a little extra cheese could cure Chipotle’s same-store-sales woes, you might be in for a letdown.

“We suspect that recent performance of Chipotle's SSS initiatives (e.g., Queso) and marketing effectiveness is likely to disappoint expectations,” RBC Capital Markets analysts David Palmer and Eric Gonzalez wrote in a Friday note.

Again With The Avocados

Ahead of Chipotle’s earnings report, which should reveal more about the firm’s future in queso, RBC maintains a Perform rating on the stock but lowered its price target from $400 to $330 and its 2017 earnings per share estimates from $7.54 to $7.25.

Based on higher avocado prices, lower sales expectations and higher labor costs, the analysts expect to see a slow in SSS growth during the second half of the year and through 2018. They lowered third-quarter growth forecasts from 2.5 percent to -1 percent but predicted an ad-driven acceleration of 3 percent in the fourth quarter.

A New Big Stink

The end-of-year sales boost could be driven by price hikes.

“Our guess is that a weaker than expected queso launch will not deter Chipotle from raising prices by year-end in select markets where it believes customers will absorb the increase with minimal pushback,” Palmer and Gonzalez wrote.

Gradual increases are expected to drive a total 2- to 3-percent surge. In April, Chipotle raised prices 5 percent in 20 percent of stores and reported positive reception.

At the time of publication, Chipotle traded at $322.66.

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Image Credit: Screengrab from YouTube