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Grocery Wars

Is Chipotle Imploding?

Chipotle Mexican Grill (NYSE: CMG) the home of tasty but overpriced burritos and overvalued stock is not dead yet. The popular eatery appears to be turning around despite a food poisoning scandal last year and a shake up on its board.

Chipotle had a very bad year last year, with its revenues dropping by $597 million, nearly $600 million, over the course of 2016, ycharts data indicates. The Mexican Grill reported $4.501 billion in revenues in December 2015 and $3.904 billion a year later.

The good news is that the revenues turned around after hitting a low of $3.867 billion in September. That indicates the public is starting to forget about the 2015 E. Coli outbreak that caused sales to fall by 20%.

The E. Coli scandal might be fading but Chipotle faces another potentially more destructive pest in the form of Wild Bill Ackman of Pershing Square Capital. Pershing Square owns around 10% of Chipotle’s shares and Ackman wants it to speed up its recovery, The Washington Post reported. Translation a hedge fund guy from New York is going to try to tell Chipotle how to make burritos which sounds like disaster to me.

Is Chipotle Making Money?

The big problem at Chipotle right now is an income collapse which appears to be growing worse. Chipotle’s income fell by $452.66 million in 2016, dropping from $475.6 million in 2015 to $22.94 million at the end of the year.

Disturbingly, the revenue reversal did not stop the income collapse. Chipotle’s income fell by $51.90 million during fourth quarter 2016, even as the revenue turned around. The company reported a net income of $74.84 million in September and $22.94 million just three months later.

That indicates Chipotle is definitely not making any money, and will soon have to make some major changes. This might include closing restaurants, selling assets such as subsidiaries or acquisition by a larger company.

Chipotle might need to sell because it has very little float and cash. It reported a free cash flow of just $1.58 million and assets of $2.062 million December 31, 2016.

Chipotle Might be Running out of Cash

Although there is some cash the company reported $349.24 million in cash from operations on December 31, 2016. Disturbingly the cash from operations fell by $334.08 in 2016, dropping from $683.32 to $349.24 million.

The cash from operations continued during fourth quarter. Chipotle reported $375.82 million in cash from operations in September 2016 and $349.24 in December. If this continues Chipotle might soon run out of cash which would force a sale of the company.

Who would buy Chipotle? Possibly Kroger.

Another possibility is to strike some sort of deal to sell its products through or open locations in retailers such as Kroger (NYSE: KR) supermarkets. Kroger is opening ethnic bistros similar to Chipotle’s stores in some of its giant marketplace locations.

An intriguing possibility would be for Kroger to acquire Chipotle. The supermarket giant could easily afford such as transaction, Chipotle had a market capitalization of $11.55 billion on March 17, 2017, and an enterprise value of $11.12 billion on December 31.

Kroger certainly has the cash to buy Chipotle, it reported $115.34 billion in revenue on January 31, 2017. Such an acquisition might make sense for Kroger which is trying to attract more affluent customers in an attempt to offset food deflation.

Another problem Kroger is facing is that Americans are spending more money at restaurants than at supermarkets. Quartz estimated that Americans spent around $55 billion at restaurants and around $51 billion at grocery stores in 2016. That’s one reason why the grocery giant is adding more cooked meals to its stores, which would make a Chipotle acquisition seem logical.

Is Chipotle a Good Investment?

Chipotle might be a good investment for Kroger, but it is definitely a lousy investment for everybody else. The stock paid no dividend but it was trading at $416.57 a share on March 21, 2017. Nor was its return on equity very good, that was just 1.43% on December 31, 2016.

Average people should stay far away from Chipotle stock because it is overvalued and the company is heading for an implosion; if the income drop is not reversed. Definitely eat Chipotle’s burritos; they’re great, but stay away from its’ stock. CMG is a lousy investment that might soon disappear from the stock exchange.