Investors betting on a quick turnaround at Chipotle (CMG) were dealt a bitter blow on Monday after the burrito chain confirmed that efforts to repair its tarnished reputation and steal back market share from peers following a series of damaging food-borne illness outbreaks in late 2015 will continue to weigh on the company’s bottom line.
In a Securities and Exchange Commission filing, Chipotle confirmed that marketing and promotion expenses will likely rise between 20 to 30 basis points, representing 3.6 percent to 3.7 percent of full-year sales. This revelation, together with news that food costs are expected to remain at 34.2 percent of total revenues and that same-store sales growth predictions are unchanged, was enough to send the company’s stock tumbling by as much as 3 percent to $445 a share in after-hours trading.
Chipotle's expensive drive to convince customers to return to its scandal-ridden restaurants was initially well received by investors. Promotions, including a nationwide ad campaign highlighting the company’s vow to provide healthier cuisine than rival brands, free food offers and the addition of desserts to its menu, helped to convince many investors that the troubled food chain was making all the right moves to salvage its damaged reputation. (See also: Chipotle Reminds Customers It's 'Real' in TV Ad Push.)
This optimism was further fueled by a recovery to same-store sales, following five straight periods of decline. In its latest Securities and Exchange Commission filing, Chipotle confirmed that this encouraging trend has continued, prompting it to reiterate expectations that same-store sales will grow in the high-single digits.
However, judging by the negative reaction to this latest update, it would appear that investors expected the company’s costly string of promotions to yield better progress. Chipotle is set to release its second-quarter results on July 20. (See also: Rise and Fall of a Wall Street Darling: Chipotle.)