Spic­ing up menu, Chipo­tle says

Will cheese dip save the day for be­lea­guered chain?

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - CRAIG GIAMMONA

Chipo­tle Mex­i­can Grill, look­ing to fi­nally put con­cerns about food safety be­hind it, sees the roll­out of queso and other ini­tia­tives as a way to win back cus­tomers.

The melted-cheese dish, a sta­ple of Tex-Mex cui­sine, is to be added to Chipo­tle menus na­tion­ally as early as mid-Septem­ber. The com­pany also is test­ing frozen mar­gar­i­tas, new sal­ads and a crispy cin­na­mon dessert, items that even­tu­ally could get wider adop­tion.

Menu changes, which have been rare for Chipo­tle dur­ing its more than two-decade his­tory, are part of ef­forts to get cus­tomers’ at­ten­tion back on the food — rather than health crises.

The com­pany suf­fered a fresh round of headaches last week, when a norovirus out­break was re­ported in Vir­ginia and mice were dis­cov­ered at a Texas restau­rant. Chipo­tle re­ceived a new sub­poena from a U.S. at­tor­ney’s of­fice in Cal­i­for­nia over the norovirus case, part of an on­go­ing in­ves­ti­ga­tion.

Head­lines ear­lier this month sent the shares spi­ral­ing to their low­est level in more than four years. They also re­newed fears that the chain can’t seem to put a 2015 health de­ba­cle in its rearview mir­ror.

“We came to the con­clu­sion that we need new news,” Chief Ex­ec­u­tive Of­fi­cer Steve Ells said. “Queso, we think, is go­ing to help us with that new news, and we’re ex­cited about the tests to come.”

Even as chal­lenges re­main, the Den­ver-based com­pany showed progress on its bot­tom line. Chipo­tle posted earn­ings last week that eas­ily beat an­a­lysts’ es­ti­mates in the sec­ond quar­ter. Op­er­at­ing mar­gins at its restau­rants climbed, a sign Chipo­tle is get­ting a pay­off from higher prices and ef­forts to keep a lid on la­bor ex­penses.

Still, the fed­eral sub­poena, an­nounced in a fil­ing last week, weighed on the shares. They fell as much as 1.9 per­cent to $341.89 in New York.

Chipo­tle, once a high-fly­ing restau­rant-in­dus­try dar­ling, was hit with an E. coli out­break in 2015 that sent its sales and stock price plum­met­ing. In re­sponse, the com­pany up­dated its safety pro­to­cols and boosted its mar­ket­ing. But Ells re­mains un­der pres­sure to mount a sus­tained come­back.

In­vestors got a painful re­minder of the health cri­sis ear­lier this month when Chipo­tle tem­po­rar­ily closed a restau­rant in Ster­ling, Va., af­ter a sus­pected norovirus out­break. More than 135 cus­tomers fell ill af­ter vis­it­ing the lo­ca­tion, ac­cord­ing to lo­cal health depart­ment of­fi­cials.

Chipo­tle saw a de­crease in sales of about 5.5 per­cent in the im­me­di­ate af­ter­math of the in­stance, the com­pany said. But it doesn’t ex­pect the health scare to af­fect its longer-term guid­ance.

Adding to Chipo­tle’s woes, video of mice in a Dal­las restau­rant was shared on­line ear­lier in July. The in­ci­dents con­trib­uted to seven straight days of stock de­clines for the com­pany.

The Vir­ginia in­ci­dent stemmed from store man­age­ment not fol­low­ing up­dated pro­to­cols, Ells said.

“We be­lieve some­body was work­ing while sick,” he said. Ells, 51, apol­o­gized to cus­tomers who fell ill.

The com­pany also ac­knowl­edged that it needed to re­fo­cus on the oper­a­tions of its restau­rants.

“We need to do a much, much bet­ter job,” Ells said.

The neg­a­tive pub­lic­ity led Chipo­tle’s big­gest in­vestor, Bill Ack­man, to visit a Chipo­tle in a show of sup­port. The bil­lion­aire, whose firm owns about 10 per­cent of the bur­rito chain, tweeted a pic­ture of him­self in line at the restau­rant.

The sec­ond-quar­ter re­sults don’t re­flect the lat­est in­ci­dents, since the pe­riod ended June 30. But they brought op­ti­mism to the be­lea­guered chain.

Earn­ings rose to $2.32 a share last quar­ter, top­ping the $2.18 es­ti­mated by an­a­lysts.

Same-store sales also jumped, although they were a bit be­low Wall Street es­ti­mates. They climbed 8.1 per­cent, com­pared with a Con­sen­sus Metrix pro­jec­tion of 9.5 per­cent.

Chipo­tle also has a new tac­tic for at­tract­ing cus­tomers: a drive-thru win­dow. The chain plans to test the con­cept in Ohio.

Queso, mean­while, will be ex­panded to 350 restau­rants in Cal­i­for­nia and Colorado in Au­gust be­fore po­ten­tially go­ing na­tional the next month — depend­ing on how the tests go.

La­bor sav­ings and a de­crease in pro­mo­tions have helped fuel profit this year, Chipo­tle said. Its restau­rant level op­er­at­ing mar­gin rose to 18.3 per­cent in the first six months of 2017, com­pared with 11.6 per­cent a year ear­lier.

Sta­bi­liz­ing the com­pany’s core busi­ness is still the pri­or­ity, said Peter Saleh, an an­a­lyst at BTIG. The menu changes will help only if Chipo­tle is be­ing well man­aged, he said.

“Th­ese are all great ideas when the busi­ness is sta­ble,” Saleh said. “But I’m not sure how much it helps when they’re tak­ing two steps back and one step for­ward.”


A cus­tomer eats lunch at a Chipo­tle restau­rant in Port­land, Ore., in 2015.

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