Chipotle was on track to post its worst fall this year, after the US burrito chain warned that its marketing expenses have eaten up a greater share of sales in the current quarter than at the start of 2017 as it works to lure customers back after its food-safety crisis in late 2015.
The Denver-based group said that it expects marketing and promotional costs to be up 0.2 – 0.3 percentage points in the current quarter from the first three months of this year, to 3.6 – 3.7 per cent of sales.
As a result, Chipotle expects its “other” operating costs as a proportion of sales to be “at or slightly higher than reported for the first quarter”. Other operating expenses, which include marketing costs along with a handful of other items, clocked in at 14.1 per cent of revenues in the first quarter, according to regulatory filings.
Other expenses jumped to 16.4 per cent of sales in 2016, from just 11.4 per cent the year prior as Chipotle launched an aggressive advertising campaign aimed at bringing customers back though its doors.
Chipotle’s warning late on Monday that it expects higher promotional expenses in the second quarter of this year sparked concern over profit margins.
Mark Kalinowsk of Nomura noted that he reckons “continued investments will be required” to rev up sales growth this year and next. He cut his outlook for earnings per share for 2017 and 2018 and reduced his price target on the stock almost 6 per cent to $480 a share.
The shares were down 6.2 per cent on Tuesday to $430.27, leaving Chipotle poised for its heaviest fall since December 6, 2016.
Chipotle, once a Wall Street high flier, came under intense pressure in late 2015 after a series of at least six food-safety outbreaks linked to the chain caused sickness in 485 people in 13 US states. The crisis weighed heavily on Chipotle’s sales and sent the stock plummeting from an all-time closing high in August 2015 of $757.77.
Chief executive Steve Ells has emphasised the group’s focus on better-quality ingredients as part of his bid to rev up the customer experience and reinvigorate sales. As part of that push, Chipotle said in March that it rid the chain of any artificial colours, flavours and preservatives, something it claims no other US fast-food chain has accomplished.
He has also launched programmes aimed at reducing employee turnover and boosting the levels of customer service provided by its workers.
“I’m as optimistic as I’ve ever been since starting Chipotle nearly 24 years ago. Since last fall, when I acknowledged that many of our restaurants were not meeting my expectations, we have made incredible progress,” he said in April of this year.