Forget Chipotle, Invest In These Restaurant Stocks Instead

Chipotle Mexican Grill, Inc. (NYSE:CMG) had been an investor favorite with revenues exhibiting an extraordinary CAGR of over 23% til 2014 from the time it went public. The stunning performance was supported by solid comparable restaurant sales (comps) growth.

However, Wall Street’s darling fell from grace toward 2015-end, as a slew of E. coli and norovirus contamination incidents derailed its growth story. In fact, despite various food-safety initiatives, Chipotle continues to reel under the negative publicity associated with food-borne illnesses which has impacted its share price by nearly 17% year to date.

Over the past 60 days, the Zacks Consensus Estimate has decreased 11.5% for 2016 earnings, adding to the company’s woes. Moreover, for 2016, sales and earnings are projected to decline nearly 10% and 75%, respectively, raising questions over this Zacks Rank #4 (Sell) company’s prospects.

What’s Hurting Chipotle?

Chipotle’s performance has been largely dented by the food-safety issues. As a safety measure, the fast casual chain was forced to close several outlets. Although these were reopened later with fresh ingredients and extensive cleaning and sanitizing activities, the incidents dealt a severe blow to Chipotle’s sales.

The fact that Chipotle uses only healthy ingredients has long been its marketing strength and has been attracting customers despite its comparatively high prices. Thus, given the negative publicity related to food-borne illnesses, Chipotle’s popularity among health-conscious diners is declining. The company thus expects both earnings and revenues to remain under pressure in the near term.

At its fourth-quarter 2015 conference call, Chipotle stated that it is not possible for the company to provide any meaningful comps outlook for 2016 in the wake of the prevailing volatile sales trends. The company added that future sales prediction is difficult as it awaits further developments and other announcements from health authorities.

Meanwhile, other restaurants have been working on providing customers with healthier food and innovative menu options in the fast casual restaurant space, intensifying competition for Chipotle. In fact, owing to food-safety issues and increased competition, in Jun 2016, Chipotle lost the tag of the most popular Mexican restaurant, per an annual survey from Harris Poll, which is likely to further hurt traffic.

Moreover, a recent CNNMoney report revealed that nearly 10,000 of Chipotle’s workers have joined a class-action lawsuit against the company for wage theft, thereby compounding its woes.

Going forward, Chipotle expects combined marketing and promo expenses to remain at elevated levels as the company plans to continue to connect with its customers to reclaim their trust and loyalty and bring them back to its stores. Thus, the costs associated with these and the expenses to support the company’s newly designed food safety program will continue to impact profitability.

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Also, implementation of food safety practices has increased the amount of labor required to prepare and serve food, resulting in higher labor costs which may continue to keep profits under pressure.

5 Alternate Picks

Chipotle might be going through a rough patch but there are other restaurant stocks that are performing well at the moment.

With the help of the Zacks Investment Research

Written By: Zacks Investment Research