Chipotle Shares Under Review, Cut Expected to Fair Value Estimate

While we've consistently said

In our view, Chipotle is a unique case among restaurants recovering from food safety issues, largely because this case calls into question the "Food with Integrity" mantra that its brand was built upon. We believe this is evident in not only the 23.6% comp decline during the second quarter, but also the 20.5% decline thus far in July (well off market expectations calling for declines in the low-double-digit range). Management pointed out that its current Chiptopia loyalty program was aimed at its most loyal customers, who have returned to the restaurant but at a much lower frequency than in the past. While Chiptopia has had a positive impact on traffic--comparable transactions are down 15% thus far in July versus a 20% decline in June--we're concerned that the program (and potential future iterations) doesn't address less regular customers and makes loyal customers more dependent on discounts, which would suggest impairment to the pricing power of the brand. In our view, this could put longer-term post-recovery comparable sales growth closer to the low- to mid-single-digit range analogous with much of the quick-service restaurant category, not the high-single-digit or low-double-digit rates the market has become accustomed to.

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