Chipotle Mexican Grill: A Damaged Brand

The damage that one scandal can do to a company is on display at Chipotle Mexican Grill (NYSE: CMG). This ridiculously overpriced market favorite is facing a significant revenue loss, because of the norovirus outbreak that sickened both workers and customers earlier this year.

Chipotle finished 2015 with revenues of $4.501 billion that figure fell to $4.247 billion on March 31 – which represents a revenue drop of $231 million for the first quarter. It looks as if the bad publicity about food poisoning has certainly hurt Chipotle’s sales.

An even greater casualty of the scandal was Chipotle’s net income; which dropped by $149.07 million during the first quarter. Chipotle started the quarter with a net income of $475.6 million that fell to $326.53 million on March 31, 2016.

Has Chipotle Entered the Death Spiral?

Also taking a hit was Chipotle’s cash from operations; which fell from $682.32 million in December 2015 to $502.28 million in March 2016. That means the amount of cash flowing through Chipotle’s till fell by $181.04 million.

This represents a pretty significant loss that could start affect ability to operate at some point. No company can survive with income losses of $149.07 million a quarter or a profit margin of -3.17%, which was what Chipotle reported on March 31, 2015.

Not surprisingly the greatest decline was in Chipotle’s cash and short-term investments. Chipotle had $663.2 million in the bank on December 31, 2015, and $250.81 million on March 31. That made for a drop of $412.39 million, which indicates that Chipotle has been using its cash to sustain its operations. A sign that could signal the beginning of the death spiral.

Can Chipotle Survive?

Naturally many investors will be wondering if Chipotle can survive. I think it will, because of the company’s ludicrously high stock price; and because it is a strong brand with really good and popular products.

Despite a dismal earnings report; and all the bad news about the norovirus, Chipotle was still trading at $420.16 a share on April 29. That gave the company a market capitalization of $12.27 billion which was still higher than its enterprise value of $12.11 billion on the same day.

This indicates that Mr. Market still loves Chipotle; and that the company still has a lot of good will out there. A lot of people still believe in Chipotle; and have faith in its ability to turnaround. Obviously a company cannot be sustained by faith alone, but it is an indication of the strength of Chipotle’s brand.

America Still Loves Chipotle

The brand is still very strong, and attracting a lot of customers. The last time I dropped into Chipotle; in late March in the working-class steel town of Pueblo, Colorado, the place was crowded.

What really interested me was that it was around 3 p.m. on a Saturday afternoon; in a city where the demographics do not favor Chipotle, yet it was doing a great business. There was a long line of people queuing up to buy burritos.

Chipotle is still a good brand with great products that are very popular. The restaurants are still clean and well-managed. They also appear to much better run and more efficient than most fast-food outlets. More importantly, Americans are still willing to line up to pay $8 for a burrito.

If the company could put the norovirus scandal behind it, Chipotle would quickly recover. Even if the company does not recover; the brand will probably survive, because somebody else will buy the company and operate it.

Chipotle should be able to survive; if it can avoid more food-poisoning scandals. This might mean it will have to slow the footprint growth, and perhaps dispose of some of its franchisees.

Great Company, Lousy Investment

Despite that Chipotle is still a lousy investment because it is terribly overpriced. Paying $420.16 a share for Chipotle stock is simply moronic, because there’s nothing in the company’s earnings report to justify that.

I view Chipotle like I do Amazon (NASDAQ: AMZN), it’s a good company and I’ll gladly do business with it but I will not touch its stock. Therefore I’ll probably buy a few Chipotle burritos in the near future, but its stock will not grace my portfolio any time soon. Largely because Chipotle’s share price has nowhere to go but down, way down.