Chipotle Mexican Grill, Inc. CMG was once the apple of every investor’s eye with revenues exhibiting a phenomenal CAGR of more than 23%, since going public, supported by solid comparable restaurant sales (comps) growth. However, Wall Street’s favorite fell from grace toward 2015-end, as a slew of E. coli and norovirus contamination incidents derailed its growth story. In fact, shares of the fast casual restaurant operator plunged more than 29% year-to-date.
Negative Publicity
Chipotle has been reeling under negative publicity related to the E. coli outbreak – which affected more than 50 guests – in Oregon and Washington at the end of October. It later spread to seven other states namely, Illinois, Maryland, Pennsylvania, California, Minnesota, New York and Ohio.
As a safety measure, the fast casual chain closed several outlets in November since eight of its restaurants in Oregon and Washington were linked to the incident. However, these were reopened about 10 days later with fresh ingredients and deep cleaning and sanitizing.
In December, a norovirus outbreak at an outlet in Boston's Cleveland Circle affected around 136 diners, including 30 students of Boston College. Chipotle immediately closed the outlet, which was reopened about 20 days later and the company made it mandatory to test fresh food products, raw meat and dairy products before being cooked.
Unfortunately, last week, the U.S. Centers for Disease Control and Prevention (CDC) announced that it was probing the restaurateur’s links with a new E. coli outbreak (with a rare DNA fingerprint) in three states – Kansas, North Dakota and Oklahoma.
Though the negative publicity cannot be discounted, what’s more alarming is the fact that as soon as Chipotle reopens a store, it's forced to close another because of new cases of infection.
Volatile Sales
Chipotle’s sales have taken a major blow post the first E. coli outbreak. Also, earlier this month, the restaurateur withdrew the 2016 comps outlook in view of the current volatile sales trends. The restaurateur further stressed on the difficulty of predicting sales trends as a lot depends on the results of the probe by the health authorities.
Chipotle confirmed that sales have been ‘extremely volatile’ during the last quarter of the year due to the health scares. While the company reported low single-digit comps growth in October, it declined 16% in November.
In fact, negative publicity is likely to remain a top-line headwind and fourth-quarter comps are expected to decline 8–11%.
The company projects operating margins in the 22–24% range for the fourth-quarter, much lower than the year-ago quarter level of 26.6%. Earnings are expected to be between $2.45 and $2.85 per share, substantially below $3.84 reported last year. Chipotle expects non-recurring expenses of $6–$8 billion, including the costs to replace food in certain restaurants and test food samples. (Read: Chipotle Shares Tumble on Weak Q4 Outlook, E. coli Woes).
Shift from Main Selling Point
The fact that Chipotle has used only healthy ingredients has long been its marketing strength and attracted customers despite the comparatively high prices. With the negative publicity associated with the E. coli outbreak, Chipotle is likely to fall out of favor with health-conscious diners.
Chipotle has also reportedly enforced stricter guidelines for suppliers in the wake of these outbreaks and management is unsure whether all its local suppliers will be able to comply with them. So changing suppliers would in turn raise the costs and be a major shift away from the company’s marketing policy of using locally produced ingredients.
Apparently, the weak fourth-quarter outlook is the least of Chipotle’s worries as is indicated by its fundamental statistics. EPS is projected to plunge 33.82% in the current quarter for this Zacks Rank #5 (Strong Sell) stock.
This is not all.
Chipotle trades at a price to book (P/B) of 6.43x, while the industry as a whole trades at a P/B of 3.82x. Estimates aren’t on Chipotle’s side either, with almost all analysts revising their estimates downward in the last 30 days for this quarter.
Nonetheless, we have zeroed-in on 5 restaurant stocks that had a great year, with solid year-to-date growth. So let’s dig in!
Chuy's Holdings, Inc. CHUY
Headquartered in Austin, TX, Chuy’s owns and operates full-service restaurants serving a distinct menu of authentic Mexican food. The company offers appetizers, soups and salads, tacos, burritos, enchiladas, fajitas and combination platters. It operates chains throughout Texas, Alabama, Indiana, Kentucky and Tennessee, under its subsidiary, Chuy’s Opco, Inc.
Chuy’s Holdings carries a Zacks Rank #2 (Buy) and boasts a year-to-date price change of more than 60%.
Carrols Restaurant Group, Inc. TAST
Headquartered in Syracuse, NY, Carrols Restaurant operates through its subsidiaries – including Carrols Corporation – and is one of the largest restaurant companies in the U.S. The company operates three restaurant brands in the quick-casual and quick-service restaurant segments with over 500 company-owned and operated restaurants in 16 states and several franchised outlets in the United States, Puerto Rico and Ecuador. Carrols Restaurant Group owns and operates two Hispanic Brand restaurants, Pollo Tropical and Taco Cabana. It is also the largest Burger King franchisee, based on the number of restaurants, and has been operating Burger King restaurants since 1976.
Carrols Restaurant, sporting a Zacks Rank #1 (Strong Buy), witnessed year-to-date price change of higher than 57%.
Dave & Buster's Entertainment, Inc. PLAY
Headquartered in Dallas, TX, Dave & Buster's Entertainment owns and operates venues in North America that combine dining and entertainment. The company offers the opportunity to “Eat and Drink” and “Play and Watch” at one location. Eat and Drink is offered through a full menu of Fun American New Gourmet entrees and appetizers and a selection of non-alcoholic and alcoholic beverages. The company's Play and Watch offerings include an assortment of entertainment attractions centered on playing games and watching live sports and other televised events.
The Zacks Rank #1 stock has seen its price change around 53% year-to-date.
The Wendy's Company WEN
Headquartered in Dublin, OH, Wendy's is one of the leading quick-service restaurant companies. It operates as a quick-service hamburger company in the United States. The company, through its subsidiary – Wendy's International Inc. – operates as a franchisor of the Wendy's restaurant system. As of Sep 27, 2015, the company had 6,487 restaurants, of which 852 were company owned and located in the U.S.
The Wendy’s menu features hamburgers, chicken breast sandwiches and wraps, chicken nuggets, chili, baked and French fried potatoes, freshly prepared salads, soft drinks and Frosty desserts.
Wendy’s carries a Zacks Rank #2 and recorded about 21% price change year-to-date.
Darden Restaurants, Inc. DRI
Headquartered in Orlando, FL, Darden is one of the largest casual dining restaurant operators worldwide. The company has operations in the U.S. and Canada with more than 1,500 outlets, under the Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's, and Yard House brands.
The Zacks Rank #2 stock has seen its price change roughly 21% year-to-date.
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