Can melted cheese be Chipotle's savior?
Chipotle Mexican Grill, looking to finally put concerns about food safety behind it, sees the rollout of queso and other initiatives as a way to win back customers.
The melted-cheese dish, a staple of Tex-Mex cuisine, is slated to be added to Chipotle menus nationally as early as mid-September. The company also is testing frozen margaritas, new salads and a crispy cinnamon dessert, items that eventually could get wider adoption.
Menu changes, which have been rare for Chipotle during its more than two-decade history, are part of efforts to get customers' attention back on the food -- rather than health scares. The company suffered a fresh round of headaches last week, when a norovirus outbreak was reported in Virginia and mice were discovered at a Texas restaurant. Chipotle received a new subpoena from a U.S. Attorney's Office in California over the norovirus case, part of an ongoing investigation.
Last week's headlines sent the shares spiraling to their lowest level in more than four years. They also renewed fears that the chain can't seem to put a 2015 health scare in its rearview mirror.
"We came to the conclusion that we need new news," Chief Executive Officer Steve Ells said on a conference call. "Queso, we think, is going to help us with that new news, and we're excited about the tests to come."
Even as challenges remain, the Denver-based company showed progress on its bottom line this week. Chipotle posted earnings on Tuesday that easily beat analysts' estimates in the second quarter. Operating margins at its restaurants climbed, a sign Chipotle is getting a payoff from higher prices and efforts to keep a lid on labor expenses.
Still, the federal subpoena, announced in a filing on Wednesday, weighed on the shares. They fell as much as 1.9 percent to $341.89 in New York. That follows a 7.6 percent decline this year through Tuesday's close.
Chipotle, once a high-flying restaurant-industry darling, was hit with an E. coli outbreak in 2015 that sent its sales and stock price plummeting. In response, the company updated its safety protocols and boosted its marketing. But Ells remains under pressure to mount a sustained comeback.
Investors got a painful reminder of the health crisis last week, when Chipotle temporarily closed a restaurant in Sterling, Virginia, following a suspected norovirus outbreak. More than 135 customers fell ill after visiting the location, according to local health-department officials.
Chipotle saw a negative sales impact of about 5.5 percent in the immediate aftermath of the incident, the company said on Tuesday. But it doesn't expect the health scare to affect its longer-term guidance.
Adding to Chipotle's woes, video of mice in a Dallas restaurant were shared online last week. The incidents contributed to seven straight days of stock declines for the company.
The Virginia incident stemmed from store management not following updated protocols, Ells said on a conference call.
"We believe somebody was working while sick," he said. Ells, 51, apologized to customers who fell ill.
The company also acknowledged that it needed to refocus on the operations of its restaurants.
"We need to do a much, much better job," Ells said.
Last week's negative publicity led Chipotle's biggest investor, Bill Ackman, to visit a Chipotle in a show of support. The billionaire, whose firm owns about 10 percent of the burrito chain, tweeted a picture of him in line at the restaurant.
The second-quarter results don't reflect the latest incidents, since the period ended June 30. But they brought optimism to the beleaguered chain. Earnings rose to $2.32 a share last quarter, topping the $2.18 estimated by analysts.
Same-store sales also jumped, though they were a bit below Wall Street estimates. They climbed 8.1 percent, compared with a Consensus Metrix projection of 9.5 percent.
Chipotle also has a new tactic for attracting customer: a drive-thru window. The chain plans to test the concept in Ohio.
Queso, meanwhile, will be expanded to 350 restaurants in California and Colorado in August before potentially going national the following month -- depending on how the tests go.
Labor savings and a decrease in promotions have helped fuel profit this year, Chipotle said. Its restaurant-level operating margin rose to 18.3 percent in the first six months of the 2017, compared with 11.6 percent a year earlier.
Stabilizing the company's core business is still the priority, said Peter Saleh, an analyst at BTIG. The menu changes will only help if Chipotle is being well managed, he said.
"These are all great ideas when the business is stable," Saleh said. "But I'm not sure how much it helps when they're taking two steps back and one step forward."