Chipotle: The Lines Are Back

| About: Chipotle Mexican (CMG)

Summary

Chipotle has been slammed with a deluge of negative headlines and press over the past year as a result of its widely publicized problems with food safety and disease outbreaks.

The stock has been battered severely but the company looks poised for a major comeback on the backs of increased consumer confidence and an European expansion.

An analysis of social media networks, in particular Twitter, provides strong empirical evidence that lines, and with them sales, are back.

I won't spend much time explaining the problems Chipotle (NYSE: CMG) has faced in past months - you're sure to have read about them by now. Scary disease outbreaks, loss of consumer confidence, and declining sales have battered Chipotle shares, sending them from highs of $750 to the low $400s.

I'd like to jump right in and explain exactly why I strongly believe Chipotle is poised for a major comeback on the back of its expansion plan in Europe and provide evidence that consumer confidence, and with that sales, are rising at Chipotle.

European Expansion

The company recently announced that it plans to expand in Europe, tapping Jim Slater to be the first Managing Director overseas. This is an important step towards the company towards unlocking the massive potential in Europe. With foods like tacos and burritos relatively unknown in Europe, Chipotle has the opportunity to introduce and popularize Mexican foods in the region and transform into a multinational powerhouse as other American companies such as McDonald's has done.

There are concerns about whether or not Mexican foods will be popular in Europe; however, I am optimistic on this for a number of reasons. First, Europeans are famous for living healthier lifestyles and caring more about the quality and freshness of their foods. Chipotle is in an ideal position to take advantage of this due to its commitment to providing fresh, organic, non-GMO ingredients in their foods. The company's outspoken stance on these issues will likely resonate with Europeans, who place more importance on these characteristics than their American counterparts.

Change in Marketing Tactics

The company has launched a massive advertising campaign to assure customers that its food is safe and that it is taking every preventative measure to ensure that disease outbreaks are a thing of the past. This is a very positive signal for the company's future as it had previously relied on its generous rewards program, Chiptopia, and free burrito coupons to win back customers.

The primary reason sales have suffered is due to a decline in consumer confidence due to the disease outbreaks, and addressing the issue head-on is a wise tactic by management. Dodging the issue and providing free burritos did not and will not win back customers, but addressing and publicizing its new food-handling and safety tactics has a good shot at winning back its once-loyal customers.

Lines Are Back!

A quick search for "Chipotle line" or "Chipotle lines" will yield dozens and dozens of tweets daily from people all throughout the United States either complaining or remarking at how long lines at their local Chipotle. A few examples can be found here, here, here, and here.

I took the liberty of counting the number of tweets like the ones linked, ignoring any that did not explicitly state that the line was long and counting tweets only from real accounts, not spam or news accounts. Just today, there were over 35 tweets that fit the criteria mentioned above. Extrapolating this over the course of a week, that adds up to over 240 separate instances in a week in which a customer felt the need to tweet about the length of their line at Chipotle. This is over 10% of the 2,000+ Chipotle locations in the United States. These tweets, posted in real-time, are an invaluable gauge to monitor how Chipotle is doing and gain insights from customers themselves.

This data, of course, is completely meaningless if these tweets have always occurred at the same rate. However, I subsequently used Twitter's Advanced Search feature to perform the same search again, this time filtered by tweets only on April 6. I chose this date as it is also a Wednesday, and marks the beginning of Q2, the period which Chipotle reported a 25% sales decline. I found just 12 tweets that match the criteria I mentioned, and found several that announced that there was no line, a rarity in today's search results.

I performed this same test countless times on different dates to ensure that this was not an anomaly and can confirm that tweets bemoaning massive lines are much more abundant nowadays then they were several months ago. Tweets with phrases such as "Chipotle E. Coli" are also much less common now, a clear indicator that the brand's health woes are fading in the consumer mind.

Understanding the significance of this trend only comes with an understanding of Twitter (NYSE:TWTR) and how it works: for those of you who may be unfamiliar with the service, Twitter does not contain the same neatly curated and thought-out posts that are typically the norm on outlets like Facebook (NASDAQ:FB) or Instagram. Twitter is used as a tool to post random thoughts and tidbits about daily occurrences in one's life, and as such these tweets are a solid indication that customers are regaining confidence and dining at the chain's restaurants again.

These results should come as no surprise, as it is in human nature to forget. Chipotle's food is beloved by many, and several hundred cases of outbreaks out of millions of transactions daily are simply not enough to discourage Chipotle's legions of fans from dining at the restaurant. Declining same-store sales and decreased foot-traffic were a given when headlines announcing disease outbreaks were daily occurrences - this is not the case anymore and customers are clearly forgetting about the main issue that damaged Chipotle and its stock.

I have used this analysis to successfully inform several past investment decisions, details of which can be found in my past articles.

I'd like to qualify these thoughts by stating the obvious: tweets and social media activity alone should only constitute a small portion of the research you should conduct in order to inform your investment decisions. However, I strongly believe that social media and Twitter in particular is an invaluable tool to not only influence investment decisions but become aware of new trends and developments.

Conclusion

The chain's overseas expansion plans and new marketing campaign are promising developments that have made me confident that Chipotle will regain its former glory as one of Wall Street's restaurant darlings. The social media analysis presented is also significant as decreasing foot traffic and same-store sales are primary reasons as to why the stock has suffered, and these new developments on Twitter provide convincing and empirical, albeit nonscientific evidence that these trends are beginning to reverse.

While shares currently do trade at a steep 60x P/E ratio, if Chipotle manages to regain growth and post positive quarterly earnings, shares will be able to climb back to past levels and there is a lot of room for growth; shares traded at nearly double their current levels less than a year ago. I suggest investors consider a long position in the company while its stock is in the doldrums.

Disclosure: I am/we are long CMG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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