Yahoo Finance CMG Stock: Chipotle Misses, But Bought Back $116 Million in Stock
Fast-casual pioneer Chipotle Mexican Grill (CMG) posted sharply lower revenue and earnings Thursday as the company continues to struggle following a serious drop-off in business caused by a series of E. coli, salmonella, and norovirus outbreaks linked to its restaurants.
But despite the second-quarter miss on both revenue and earnings, the company says it has returned to profitability, and shares were little-changed in trading immediately after the release.
Before Thursday's report, CMG stock had fallen 38 percent last year and 13 percent in 2016. In the first quarter, Chipotle posted its first-ever loss as a public company. But in Thursday's report, CMG's struggles were on full display again.
Earnings per share cratered, slumping from $4.45 a year ago to 87 cents. Revenue also slumped, falling from $1.2 billion a year ago to $998.4 million. Analysts were expecting EPS of 93 cents on revenue of $1.05 billion.
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A long road to recovery. Despite a steadfast expansion in its store base, Chipotle's financial recovery is expected to be a multi-year process. In 2015, CMG earned $15.10 per share; going into Thursday's report, Wall Street expected EPS of just $4.39 in 2016 and $11.23 in 2017. Heavy promotions like free burritos and buy-one-get-one-free coupons, on top of loyalty programs and a slightly expanded menu haven't yet been able to bring all its customers back.
K C Ma, professor of finance at Stetson University, doesn't think old-school marketing and promotion gimmicks will be enough to put the Chipotle back on good footing.
"The company will have to eventually confront the real issue by openly announcing new, stricter food safety protocols to win back customers' trust. Otherwise, it will take a much longer time to repair the damages to the company's reputation," Ma says.
That said, the company claimed its loyalty program, Chiptopia, was "off to a nice start."
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Still, it wasn't nice enough to make much of a difference in Chipotle's results. Same-store sales dropped 23.6 percent last quarter, following a 29.7 percent first-quarter slump and a 14.6 percent fourth-quarter slowdown. It's tough to grow a business that way.
Restaurant level operating margins were also down, falling to 15.5 percent from 28 percent in the year-ago period. In its news release, Chipotle said the decrease was "primarily driven by unfavorable sales leverage, and to a lesser extent by higher marketing and promotional costs."
The company still expects to open between 220 and 235 new restaurants this year, consistent with prior guidance.
Believe in yourself. To the company's credit, Chipotle has invested heavily in itself, even as Wall Street punished its share price, which has a 52-week high of $758.61 but closed Thursday at $418.07. In the fourth quarter, Chipotle bought back $460.7 million worth of CMG stock, then followed that up with another $583.8 million buyback in the first quarter.
Chipotle continued buying back stock last quarter, spending over $116 million on buybacks in the second quarter. That strategy could end up working out, but so far it's been a poor investment for shareholders and Chipotle's cash and investments have fallen from $879.2 million a year ago to just $270.1 million today.
Not only does that give Chipotle less money to buy back its own stock, but more importantly it reduces its ability to reinvest in its own expansion. Stock buybacks aren't always the best way to allocate capital; purchases are hard to time correctly, they're often done for the wrong reasons, and the opportunity cost can be extraordinary.
When a company buys back stock, discerning whether it's a good or bad idea can be as simple as taking a look at its financial statements. With Chipotle's rapidly depleting cash pile and the poor timing of its buybacks thus far, the company might be wise to stop buying back CMG stock so aggressively.
The birth of tragedy. Chipotle's woes all started with a series of food safety crises that began last summer. Hundreds of customers came down with a variety of food-borne illnesses after several outbreaks hit select Chipotle restaurants across the U.S.
The outbreaks, which occurred between August and December of 2015 and involved restaurants in 13 separate states, were thought to have been over, and on Feb. 1, the Centers for Disease Control declared that the outbreaks finished.
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Then, in March, consumer fears were revived as several employees at a Massachusetts Chipotle came down with norovirus. While there have been no outbreaks since then, it's clear the company remains on fragile footing.
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