Chipotle Mexican Grill ("Chipotle (NYSE:CMG)") is a controversial investment. Everyone reading this is familiar with the food safety issues from late 2015 that resulted in widespread media attention and falling store traffic and sales. Essentially, the average Chipotle was generating about $2.5 million of annual sales prior to this period, and as of the first quarter of 2016, was running at a $1.9 million annual sales pace. Chipotle is less profitable at that level of sales and is spending a significant amount of money on promotions, higher food safety related expenses, one-time costs, and inefficiently staffed restaurants. Today, the stock is trading for about $390 per share, which is about 50% below its 2015 high, and bearish sentiment is near-universal.
The only question that matters is: is this permanent or temporary?
I think it is temporary for the following reasons:
- Chipotle is tremendously popular, even now. Only a handful of quick-service or fast casual restaurants have ever achieved the $2.5 million of average unit volume that Chipotle achieved. Even a wounded Chipotle is currently generating over $1.9 million of annualized sales per unit, which beats most of its peers, and crushes its peers in the Mexican category. Taco Bell, Moe's, Qdoba, and Baha Fresh generate $1.4 million, $1.2 million, $1.2 million, and $1.2 million of average unit volume, respectively.
- The widespread media coverage of the food safety issues is long gone. Those memories will continue to fade over time. Jack in the Box (JACK), McDonald's (MCD), Burger King, Taco Bell, and several others have endured their own food safety incidents and very few people remember them today. Each of those brands recovered and returned to growth in the years following those incidents. Things are unlikely to be different this time, but it will take time.
- Chipotle's same-store sales were down
