Goldman Downgrades Chipotle On Near-Term Risk

Chipotle Mexican Grill, Inc. CMG's mid-quarter update revealed ongoing comp risk even from “normal” events, as well as ongoing cost risk due to the company’s promotional strategy, which is based on coupon drops.

Goldman Sachs’ Karen Holthouse downgraded the rating on the company to Neutral, while lowering the price target from $550 to $500 and removing the stock from the Americas Buy List.

Causes for Concern

Holthouse mentioned that Goldman Sachs’ survey and aggregated social media data regarding customer opinions was a cause for concern, while adding “increased concerns about the cadence and costs of the comp recovery” had fully offset the confidence in any longer term upside.

The analyst also noted the recent norovirus incident in Boston was a clear indicator of the headline risk that Chipotle Mexican Grill could not control.

In addition, the company has been incurring higher than anticipated promotional costs, with “the current costs/recovery ratio” causing some concern regarding “the return on spending in place.”

Survey Data

The survey data also led to concerns regarding the medium to longer term, with 36.3 percent/31.7 percent consumers still saying that food safety would make it less likely for them to eat at Chipotle Mexican Grill.

Holthouse pointed out that the figures were down only 3.8 percent/2.3 percent from the level seen immediately after the incidents.

The EPS estimates have been reduced “to reflect a reduced top line and higher restaurant expenses,” the analyst added.