It’s a perfect storm in fast-casual…
We wrote about all of the troubles at Chipotle (CMG), “Chipotle Fourth Quarter Comps Suffer Greatly; Could Qdoba Be the One to Eat Chipotle’s Lunch,” and the fast-casual burrito-maker’s fourth-quarter performance, released February 2, was a doozy. Revenue fell ~7% as comparable restaurant sales dropped almost 15% in the quarter (it still opened up 79 new restaurants, however). Chipotle’s restaurant level operating margin cratered 700 basis points, while net income fell 44%, driving earnings per share down by a similar margin during the period. All of this may have been expected, but it is still quite shocking to witness these “terrible” numbers by the fast-casual giant. Management indicated that January comparable store sales were down 36%, so things may get worse before they get better.
It appears they could get much worse…
Concurrent with its quarterly release, the burrito-making giant announced a “probe originally linked to just one food-safety incident at a California restaurant had widened into a national investigation.” The latest information is that Chipotle received a new subpoena at the end of last month that superseded an earlier one that had been limited to just one restaurant in Simi Valley. At this point, nobody can truly handicap the outcome of the investigation, and we’d be guessing whether there was any real wrongdoing and what the fines, if any, may be. With all of the food-quality “scares” across its restaurants in various parts of the country, one could probably have assumed that such a probe would grow, but was there something particularly unusual that they found in the initial review? We’re certainly curious, and we’re starting to think that the conclusion of the CDC investigation may not be the end of Chipotle’s woes. Can you blame us for wanting to remain on the sidelines?
Adding to some of the pain in fast-casual, Best Ideas Newsletter portfolio holding Buffalo Wild Wings (BWLD) has turned into nothing short of a nightmare for us. Not only has the Chipotle “meltdown” weighed on the niche as a whole, including B-Dubs, but then today, February 3, the company that prides itself on ‘Wings, Beer, and Sports’ announced that it, too, has been subject to an “illness report.” According to the Kansas City Star, “at least 10 people, including some Shawnee Mission students, suffered a gastrointestinal illness after visiting the restaurant last week.” The report, for one, is terrible to those that have fallen ill, but it also comes at perhaps the worst possible time, with investors now fearing the worst after watching the collapse in Chipotle’s shares. We simply can’t jump to conclusions though, as the reported symptoms of “vomiting and diarrhea” could be “attributed to a lot of things.” Food Safety News, for one, reported that “small norovirus clusters are common during the winter,” so we’re monitoring the situation closely for now.
In any case, the “food illness” report coupled with the release of Buffalo Wild Wings’ outlook has made for a difficult situation. Not only did B-Dubs miss “expectations” on both the top and bottom lines in its fourth-quarter report, but its earnings guidance for 2016 came in at $5.95-$6.20 per share, below the consensus mark of nearly $6.48 per share, which itself is slightly below our target for the year. To be fair, the quarter itself wasn’t bad. Total revenue advanced nearly 20% thanks to robust unit expansion and positive same-store sales performance at both company-owned and franchised restaurants, and the company leveraged that top-line growth into more than a 24% jump in net earnings. The lower-than-expected outlook, however, means readers should expect a downward adjustment to the fair value estimate of shares, albeit a minor one, but we were very pleased to see the company leverage food and labor cost savings, especially given that same-store sales in the fourth quarter (1.9%, 0.1%) came in noticeably lower than the full-year mark (4.2%, 2.5%).
Though we were hoping for more as it relates to Buffalo Wild Wings’ 2016 outlook, its brand remains “strong and vibrant,” and we really can’t be too disappointed with annual earnings-per-share growth targeted at 20%-25% for the year. Same-store sales expansion continued into the first four weeks of the year, albeit at a much slower pace than last year, but we believe the consumer marketplace will accept the 45-50 new company-owned and 42-57 new franchised Buffalo Wild Wings it expects to open during 2016 across the globe. Though we’ll be keeping a close eye on food incidents, we expect traffic to remain robust at the fast-casual giant. The company remains a holding in the Best Ideas Newsletter portfolio.