The latest norovirus headlines tied to Chipotle Mexican Grill Inc. have some analysts worried that same-store sales will suffer… again. But analysts at Telsey Advisory Group believe menu innovation will ultimately prove more potent than new illness reports.
Chipotle shares sank as much as 7.6% on the news, closing Tuesday down 4.3%. Shares are up nearly 1% on Wednesday.
Bob Derrington, senior restaurant analyst at Telsey Advisory Group, admits that investing in the troubled chain is “not for the faint of heart.” But Telsey upgraded Chipotle to outperform from market perform based on both the stock pullback and the company’s menu plans.
The price target remains at $440.
“We believe Chipotle’s menu has grown stale and our recent visit to its Chipotle Next Kitchen test store in New York gives us confidence that more compelling menu innovation is on the way,” Derrington emailed to MarketWatch.
Moreover, the company’s addition of queso is seen as a boost. Before the norovirus reports on Tuesday, Maxim Group upgraded Chipotle on “queso optimism,” with analysts citing it as an important catalyst for 2018.
“While in the test store, we observed at least one in three consumers requesting to add a $1.25 scoop of queso to their burritos, bowls and/or tacos,” Derrington wrote. “We believe the addition of queso will also spur incremental demand for its larger serving sizes of queso and chips (priced $3.45-$5.25) and new margaritas, and add incremental sales to its evening daypart.”
Other items being tested include salads and dessert.
As time passes from the latest incident and “assuming a lessening drag,” Telsey has a “higher degree of confidence” in its revenue and earnings estimates based on a “more aggressive sales and menu innovation plan.” Telsey forecasts fiscal 2018 revenue of $5.2 billion and earnings per share of $11.70. The FactSet consensus is for revenue of $5.2 billion and EPS of $11.89.
BMO Capital Markets downgraded Chipotle to market perform from outperform on the norovirus news, citing risk to the fast-casual chain’s same-store sales. Analysts cut the price target to $350 from $550.
On its face, the occurrence at just one location is not as significant as previous issues, in part because norovirus is common, wrote BMO. But renewed health concerns will probably leave a bad taste in many customers’ mouths.
“[C]ustomer psyche likely remained somewhat fragile in the wake of Chipotle’s previous food safety issues and we believe there is a reasonable probability that media coverage of the new illnesses will outweigh the actual severity of the incident and create renewed same-store sales weakness, similar to the impact of media coverage in late 2015 and early 2016,” wrote BMO analysts led by Andrew Strelzik.
Before Tuesday’s market close, there were about 400 news articles about the illnesses, according to data cited from Google Trends.
BMO believes the company’s “earnings power” could fall below BMO’s expectations because of the new downside to Chipotle’s average unit volume (AUV).
“The reported symptoms are consistent with norovirus,” Chipotle said in a statement emailed to MarketWatch on Tuesday. “Norovirus does not come from our food supply, and it is safe to eat at Chipotle.”
For Wells Fargo, that’s “a good news/bad news statement” because if it’s not a supply chain safety issue, the norovirus “potentially was spread from a sick employee in the restaurant.”
“Assuming this is what happened, there are still plenty of questions as to why that employee was handling food or near customers,” analysts led by Jeff Farmer said in a Wednesday note.
With the company scheduled to report earnings on Tuesday, Wells Fargo would be “impressed if Chipotle could point to flat same-store sales” in the week following the reports, and analysts expect traffic headwinds for the next several weeks.
“Chipotle’s continued same-store sales recovery was the most important foundation of our bullish thesis on the stock,” Farmer wrote.
Wells Fargo downgraded Chipotle to market perform from outperform, and lowered the price target to $375 from $470.
Chipotle shares are down 20.4% for the past three months while the S&P 500 index
is up 5.6% for the period.