It's going to take more than queso to turn around Chipotle's business.
Shares of the Mexican restaurant chain tanked Tuesday after the company posted another disappointing quarter, trimmed its same-store sales forecast and scaled back store expansion plans.
Here's how the company did compared to what Wall Street expected:
- Adjusted EPS: $1.33 vs. $1.63, according to Thomson Reuters
- Revenue: $1.13 billion vs. $1.14 billion, according to Thomson Reuters
- Same-store sales grew 1 percent vs. expected growth of 1.2 percent, according to StreetAccount
The Mexican restaurant chain said same-store sales started off strong in the third quarter, rising 4.5 percent in the first half of July before decelerating to a 2.3 percent pace. Chipotle did not cite a specific reason for the downturn.
However, the company may have been hurt by reports of a norovirus outbreak at its Sterling, Virgina, restaurant in July, with the news once again dinging Chipotle's reputation. The company has faced numerous foodborne illness outbreaks since 2015.
The company also saw mixed support for its queso nationwide product launch in September.
Chipotle introduced the cheesy dip in an attempt to bring in new diners. The introduction immediately lifted sales by a high-single digit percentage rate before leveling off, Chipotle said. Sales got a boost after Chipotle started an advertising campaign, but then fell again. About 15 percent of customers continue to order queso, the company said.
"This next menu item increased sales with existing customers. It also attracted new and lapsed customers into our stores," Mark Crumpacker, Chipotle's chief marketing officer, said on a call with investors.
Chipotle may look to add items like margaritas, salads and desserts to its menus one day. They are all being developed at the restaurant chain's test kitchen in New York. Crumpacker teased them as possibilities but did not announce any further plans.
"Chipotle is a company that historically hasn't added a lot to the menu," Crumpacker said. "When we do, we get a lot of attention for it, and there's a lot of potential for us to reignite interest in particularly with lapsed customers by making relatively small changes to our menu. It's really untapped potential for us."
There is not one reason for a slowdown at Chipotle, said Neil Saunders, managing director of GlobalData Retail. Instead, a number of factors have contributed to a "somber" quarter.
"All in all, there is a sense that Chipotle's rebirth is running out of steam," Saunders said. "In our view, this is concerning given the still fragile state of the brand and the highly competitive environment within the fast food market."
In the third quarter, Chipotle reported net income of 69 cents per share, compared with 27 cents per share in the same time last year. After stripping out 13 cents a share in impacts from Hurricanes Harvey and Irma, and 64 cents a share in costs from a previously disclosed data breach in the spring, Chipotle reported adjusted earnings of $1.33 a share.
Analysts surveyed by Thomson Reuters, had expected the company to earn $1.63 a share.
"Despite several unusual impacts during the quarter, including the impact of hurricanes, we maintained our focus and saw some encouraging signs," said Steve Ells, founder, Chairman and CEO of Chipotle, in a press release. "Our leadership remains focused on setting the foundation for future growth, and we are confident in our teams' ability to deliver against those plans."
Revenue rose 8.8 percent from the prior year to $1.13 billion, just shy of the $1.14 billion analysts were projecting. Comparable sales rose 1.0 percent, also short of Wall Street expectations.
"A revenue uplift of almost 9% is not bad per se, but when set against the 14.8% decline posted in the prior year it is clear that Chipotle has still not made up all of the ground it lost," Saunders said. "Moreover, the 1% growth in comparable revenue is anemic, especially considering comparable sales dropped by 21.9% during the third quarter of last year."
Chipotle refined its estimate for the year. It is now calling for comparable sales growth of 6.5 percent. Previously, it expected growth in the high-single digits.
Chipotle opened 38 restaurants and closed three during the quarter. By comparison, it opened 55 restaurants and closed one in the same time last year.
For 2017, Chipotle trimmed back its plans for new restaurant openings to the low end of its previously forecasted range of 195 to 210.