Chipotle to invest $50 million on restaurant refresh program, which may not be enough
Chipotle Mexican Grill Inc. was downgraded to sell from neutral at Stifel after the restaurant chain, still struggling to recover from illness outbreaks that began in 2015, said it would make a one-time discrete investment of $50 million, about $20,000 per restaurant, to upgrade and refresh its locations.
shares are down 9.6% in early Wednesday trading after the earnings announcement, which beat expectations.
The investment is in addition to the typical $10,000 per restaurant, or about $24 million, that the company spends for normal upkeep, said Chief Financial Officer John Hartung, according to a FactSet transcript of the late Tuesday earnings call.
Chief Executive Steve Ells discussed a number of planned investments using more than one-third of the company’s anticipated tax savings including training programs and bonuses for workers. In addition, the company will make upgrades to equipment and other restaurant redesigns, and continued digital improvements.
Chipotle has allotted a total of about $300 million in capital expenses for 2018, up from $217 million in 2017.
“Based on the remodel programs of other chains, we struggle to believe $20,000 per store, will have much impact to the look and feel of the restaurants,” Stifel analysts led by Chris O’Cull wrote. Even with an additional $45 million spent in about 1,000 restaurants to add digital enhancements and other expenditures, analysts still have concerns.
“[T]his level of investment still falls short of the remodel budgets for several QSR chains that range from $250,000 to $500,000 per store,” the note said.
Analysts expressed a number of additional concerns, including Chipotle’s reliance on easy comparisons rather than taking steps to drive traffic.
“We expect negative traffic to persist,” analysts led by Chris O’Cull wrote. “We believe improving traffic could prove especially difficult following the 5% menu price increase.”
Stifel rates Chipotle shares sell and slashed its price target to $250 from $310. Stifel is one of at least six analyst groups that cut Chipotle’s price target.
RBC Capital Markets also expressed traffic concerns, calling the figures “lackluster.” Chipotle reported a same-restaurant sales increase of 0.9% for the quarter. Same-restaurant sales were up 3.4% in January thanks to the additional opening on New Year’s Day, a first for the company.
There’s also a lack of new menu items.
“In the aftermath of the queso introduction, Chipotle seems to lack an innovation spark to overcome brand inertia,” analysts led by David Palmer wrote. “Unfortunately, the Chipotle turnaround will likely start slowly with operational and digital-execution improvement, followed by menu innovation.”
RBC rates Chipotle stock market perform with a price target of $310, down from $330.
Unlike many other analyst groups, SunTrust Robinson Humphrey rates Chipotle shares buy, though analysts cut the price target to $340 from $363. SunTrust says it is “confident” in same-restaurant sales growth due to upcoming sales initiatives.
“We expect same-restaurant sales to accelerate in the remainder of the year (we estimate 3.5% growth, down from 4% prior) as year-ago compares ease, digital order and pick up and catering gain momentum (second make line sales up 33%, mobile orders up 50% and catering up 20% year-over-year in Q4 2017),” analysts wrote.
Chipotle forecasts full-year same-store sales growth in the low-single digits.
Chipotle shares are down 31% for the last year while the S&P 500 index
is up 18.3% for the period.