RBC Cuts Chipotle Target To $500, Believes Company Can Rebuild Trust With Customers

• Shares of Chipotle Mexican Grill, Inc. CMG have declined 35.91 percent over the past six months, to a low of $404.26 on January 12.
• RBC Capital’s David Palmer has maintained an Outperform rating on the company, while lowering the price target from $550 to $500.
• The target price has been reduced to reflect the company’s recurring supply chain investments, as well as the increased marketing expenses.

Analyst David Palmer believes that although “January trends were disheartening… the CDC 'closure' and the company's promotional efforts will ultimately help Chipotle rebuild trust with its core customer.”

Palmer expects same store sales to decline 12 percent in 2016, while growing 9 percent in 2017. Chipotle Mexican Grill is expected to incur marketing/promotional costs worth $50 million in 1Q16, along with incremental G&A expenses of $65 million.

Related Link: Chipotle Is Down, But Is It Out?

Although the absence of near-term improvement in January sales, which declined slightly from the December level, was “disheartening,” Palmer stated that the “All Clear” from the CDC on February 2 “was an important first step in the healing process.”

Palmer believes that the company is now free to “re-engage with the consumer through PR, marketing, and promotions set to begin next week and last through the spring.”

Chipotle Mexican Grill intends to invest almost all of its near term profits in ensuring food safety and for marketing and promotions. The company’s “high returns and long-term growth opportunity” are likely unchanged, according to the RBC Capital report.

“We are optimistic that margins can begin to recover in 2017, particularly if food cost inflation remains benign as we expect,” the report added.

The EPS estimates for 2016 and 2017 have been lowered from $12.81 to $8.06 and from $17.21 to $15.08, respectively.