Perfect storm of factors behind Chipotle’s quarter of terrible events

Avocado prices shot up. Hurricanes forced restaurants to close. The bill for a hacker attack came in.

Those were reasons Chipotle Mexican Grill cited to explain its huge profit shortfall in the third quarter — just a few of the troubles on a long list. The burrito chain was also hit with a norovirus outbreak in Virginia and a public-relations nightmare when customers complained about rodents falling from a ceiling at a restaurant in Texas.

In short, it was a three-month stretch in which seemingly everything that could go wrong did. Executives made the case that the quarter of unfortunate events was an aberration, nothing indicative of foundational disarray. But investors who’ve been watching Chipotle work on its rocky comeback from the depths of the E. coli disaster in 2015 were skeptical: They sent the shares down as much as 15 per cent, their worst intraday plunge in five years.

“There is a sense that Chipotle’s rebirth is running out of steam,” Neil Saunders, managing director of GlobalData Retail, said in a note. “A number of factors have conspired in making this a sombre quarter for the company.”

Profit amounted to 69 cents a share, net of expenses tied to the data-security breach earlier this year and hurricanes Harvey and Irma. Analysts had estimated about US$1.63 a share, according to data compiled by Bloomberg.

The Denver-based company has been reeling since a wide-ranging food-safety crisis sickened hundreds, crushing its sales, profit and stock price.

The chain had started to recover in the past year, but then the norovirus incident in Virginia — along with a video of the mice at a Dallas location — sparked a fresh round of negative headlines.

Chief executive officer Steve Ells acknowledged that the latest results weren’t what he hoped for but said he believes the company’s revival is still on course.

“We’re embracing the things we need to reach our full potential,” Ells said in an interview. “From a structure standpoint — and a feeling internally — the teams are ready.”

Investors may need a lot more convincing. Chipotle shares fell to US$277 on Wednesday, tumbling to their lowest intraday price since January 2013. The stock had already slipped 14 per cent to US$324.30 this year through Tuesday.

“There were a lot of unusual items in the quarter,” chief financial officer Jack Hartung said. The one-time expenses added up to US$1.05 a share, and they weren’t telegraphed to Wall Street.

“They don’t really know what to do — and they’re not doing a good job communicating,” said Michael Halen, an analyst at Bloomberg Intelligence. The company had 425 restaurants in the direct path of the storms, and four of those locations are still closed. The hurricanes cost the chain nearly US$10 million: about six million in lost revenue and US$3.3 million in expenses, including hourly wages for idle workers, repairs and donations to charity, Hartung said.

Higher avocado prices also hurt results, he said.

But even ignoring the one-time setbacks, the numbers were a bit worse than analysts had projected. Same-store sales grew one per cent, missing the 1.2-per-cent estimate. Total revenue came in at US$1.13 billion, short of the US$1.14 billion projection.

The company expects samestore sales to gain 6.5 per cent this year. That’s below the 7.2-per-cent estimate compiled by Consensus Metrix.

One bright spot was the rollout of queso last quarter. Sales gained four per cent after the item was added to menus nationwide in September, Hartung said.

Chipotle executives have been banking on queso to help the chain regain its allure. On the previous earnings call in July, company officials mentioned the new product roughly two dozen times. The cheese dip is the centrepiece of Chipotle’s attempts to win back customers with advertising.