Chipotle's Recovery Is Slower-Than-Expected, Despite Promotions

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A Chipotle restaurant in Pittsburgh's Market Square. The company reported a sharp same-restaurant sales decline in its latest quarter. ENLARGE
A Chipotle restaurant in Pittsburgh’s Market Square. The company reported a sharp same-restaurant sales decline in its latest quarter. Photo: Associated Press

Chipotle Mexican Grill Inc. CMG -0.38 % is recovering far more slowly than expected from a series of food-safety problems last year, despite promotions and other efforts to lure back consumers.

“Most of our loyal customers have returned but not at the same frequency,” Chief Financial Officer Jack Hartung told investors on Thursday.

Although the company has returned to profitability and its sales decline has improved from a low point in January, the company’s second-quarter profit and same-store sales missed expectations.

Shares of the company, down 38% over the past year, fell 2.2% to $409 in after-hours trading. Chipotle shares lost roughly half their value from last year’s record through last month’s low.

The burrito maker had previously been loath to offer a customer loyalty program, a popular tactic of fast food chains, but unveiled one for the first time earlier this month in an effort to win back customers. Executives said 30% of transactions are now tied to the new “Chiptopia” program, with more than 3.6 million participants.

Analysts at Morgan Stanley have said that a full sales recovery could take years, citing their survey results that showed about 25% of the chain’s customers have stopped going or aren’t going as frequently.

Chipotle reported Thursday that same-store sales dropped 24% in the quarter ended June 30. The figure was less than the 29.7% retreat posted in the first quarter but worse than the 20.4% decline analysts predicted.

The company, which has also been giving away burritos and chips and focusing most of its marketing on the quality of its food, has faced criticism for not explaining the changes it’s made to its food-safety program.

Executives now say future marketing will focus on food safety improvements, including a new traceability program that will allow the company to know the supplier from which every ingredient originates.

Chipotle has moved away from testing some ingredients in central kitchens for pathogens because doing so resulted in lower quality, co-Chief Executive Steve Ells said on Thursday.

“Cutting bell peppers for testing in a central kitchen degraded the peppers,” Mr. Ells said, adding that the company has reversed testing for bell peppers, lettuce and other ingredients because its new food-safety czar James Marsden has developed other interventions to sanitize ingredients. The bell peppers are now blanched in the restaurants, a process Mr. Ells said kills pathogens.

Bell peppers and lettuce are now being chopped again in the restaurants and food quality complaints have decreased, co-Chief Executive Monty Moran said.

On Thursday, Mr. Ells also addressed the recent indictment earlier this month of Mark Crumpacker, Chipotle’s chief creative and development officer, who has been charged with cocaine possession. A call to his lawyer wasn’t immediately returned.

“We were surprised to learn of these personal issues,” Mr. Ells said. He expressed confidence in the three executives who took over for Mr. Crumpacker, who is on leave.

Chipotle reported a profit of $25.6 million, or 87 cents a share, in the quarter, down from $140.2 million, or $4.45 a share, a year earlier.

Revenue declined to $998.4 million from $1.2 billion. Analysts polled by Thomson Reuters expected a profit of 93 cents a share and revenue of $1.1 billion.



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