Cue the barf bags.
Chipotle (CMG) is down -2.5% today after a Wall Street analyst cut his outlook. "The company's third-quarter promotions--including but not limited to Chiptopia--do not appear to have had the desired effects from the company's perspective," Nomura analyst Mark Kalinowski wrote in a note to clients.
Hedgeye Restaurants analyst Howard Penney – the original bear on the stock – has been more explicit in his criticisms of Chipotle’s promotions. The Chiptopia reward program that offers free food after qualifying visits is a “joke,” Penney told CNN Money recently.
Here’s a partial explanation why. In September, same-store traffic in the Fast Casual segment (as provided by Malcolm Knapp) declined 5.8% (2-year avg. declined 50bps sequentially) versus 4.4% in August. This is compared to a 5.9% same-store traffic decline in January! The sequential decline in sales partially explains why we continue to see aggressive promotional activity from CMG.
The broad-based slowdown in fast casual merely exacerbates Chipotle’s many company-specific issues. CMG shares are down -45% since Penney turned bearish in October 2015, after the stock was crushed by the E. coli & and norovirus outbreaks earlier this year. "It's been an extraordinary destruction in value for this company that I've never seen before," said Penney. He has long argued that Wall Street consensus is “still far too optimistic.”
Chipotle’s issues run deep.
A few of the recent missteps:
- E. coli & norovirus outbreaks;
- Company executive drug abuse allegations;
- Class action lawsuit brought by 10,000 current and former employees suing over wage theft;
- A rare investigation brought by the FDA’s Office of Criminal Investigations
chipotle also faces serious cash deployment issues
According to Penney:
- $1 billion in stock buybacks, with an average price of $490
- Massive discounting does not build long-term goodwill (customers begin to expect more of the same
- Aggressive new unit growth making the recover harder
- Continued investment in new concepts (Better Burger)
In Penney’s base-case scenario, Chipotle could drop 40% to $227. Worst-case scenario? Chipotle may drop as much as 58% to $166 a share, he said.
Look out below.
