Why 2017 Was a Year to Forget for Chipotle Mexican Grill, Inc.
Coming into 2017, expectations were high for Chipotle Mexican Grill, Inc. (NYSE: CMG). The company had put the E. coli crisis behind it and comparable sales were set to jump following a sharp dive last year. However, while the year started off well enough, with Chipotle stock up more than 30% at one point in May, it's now down 19% with just one month left in the year. It's safe to say 2017 has turned out to be a bust for Chipotle.
As you can see from the chart below, there were three major pain points over the course of the year, starting in June, that caused 2017 to be such a disappointing year for Chipotle and its investors.
Let's take a closer look at each one of these sell-offs.
A guidance question
Chipotle shares were riding high through much of the first half of the year as the company seemed to bounce back from the E. coli crisis with comparable sales jumping 17.8% in the first quarter. However, questions about the company's continued growth first began to arise on June 20, when a seemingly innocuous filing set off a scare among investors.
The company filed an 8-K with the Securities and Exchange Commission to say it expected food costs to represent about 34% of revenue for the second quarter, the same as in the second quarter of 2016 , and for marketing costs to be up between 0.2 and 0.3 percentage points to a range of 3.6%-3.7%.
It also held its comparable sales guidance for the year, indicating that there was no benefit to the increased spending. Investors seemed to interpret the update as evidence that Chipotle's turnaround was not progressing as fast as hoped. As a result, the stock closed down 7% on June 20.
Another food safety scare
The following month, Chipotle stock fell again when reports emerged that a Virginia location had shut down due to a norovirus outbreak. Business Insider broke the news that at least 133 people had gotten sick at a Chipotle in Sterling, Virginia, after an infected employee came to work. Chipotle shut down the location temporarily until it sanitized it and determined it was safe to eat there.
For any other restaurant chain, it's doubtful this news would have moved the stock as norovirus is a fairly common disease, but investors are still jittery following Chipotle's series of foodborne illness outbreaks in 2015, which included salmonella and norovirus, in addition to E. coli, and any news about people getting sick at its restaurants is likely to drive even more customers away.
Also questionable was Chipotle's complete lack of response for the incident as management failed to make the news public, nor did it apologize for getting its customers sick. Such an attitude is reflective of the company's poor choices during the E. coli crisis as management was slow to apologize and pointed blame at the media and the Centers for Disease Control's reporting methods. As a result, Chipotle shares lost 13% over the subsequent week.
An earnings fail
A forgettable year wouldn't be complete without an earnings sell-off, and Chipotle was no different. Following its third-quarter earnings report, the final one of the year, the stock plunged 14.6% as the burrito chain's results badly missed the mark.
Comparable sales increased just 1%, indicating that the recovery from the E. coli crisis is essentially dead. A modest backlash after the norovirus incident pressured comparable sales, and the company's queso rollout failed to have a significant impact, despite much excitement among customers and the company itself.
Chipotle lowered its comparable sales guidance for the year to 6.5% and also slashed store openings for the next year to 130-150, its lowest total since at least 2011 and a tacit admission that the company needs to focus more on improving operations in its current store base.
Unbelievably, Chipotle is exiting 2017 in worse shape than it entered it. Not only has the stock been decimated but the company's strategy is in utter disarray. Efforts to attract customers with new menu items have fallen flat as Chipotle pulled chorizo -- last year's addition -- off the menu, and its queso has been roundly pilloried on social media. Confidence in its food safety has also faltered following the norovirus outbreak, and CEO Steve Ells even admitted nearly a year ago that store operations were subpar. It wasn't all that shocking then that Ells made the surprise announcement at the end of November that he would vacate the CEO chair once the company finds a suitable replacement. Perhaps Chipotle's next chief can find the secret sauce to get the brand back where it was, but it won't be easy.
It's clear that the company has blown any opportunity to welcome back customers after the E. coli outbreak. With the stock still sporting a pricey valuation, 2018 could be another long slog for investors. With a new CEO coming aboard, however, next year should be full of changes.
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Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.