October 24, 2017 / 9:16 PM / 24 days ago

Chipotle shares fall as store openings scaled back, profit disappoints

(Reuters) - Chipotle Mexican Grill Inc (CMG.N) will open fewer restaurants to get “fundamentals right” and posted disappointing quarterly sales and earnings on Tuesday, as the company struggles to recover from a bruising string of food safety lapses.

FILE PHOTO: Chipotle Mexican Grill is seen in uptown Washington, U.S., February 8, 2016. REUTERS/Carlos Barria/File Photo

Shares in the burrito chain were down 9.5 percent in extended trading after executives reported slightly weaker-than-expected sales at established restaurants despite introducing a queso cheese dip in September. Chipotle also announced it would raise prices by roughly 5 percent in almost 900 stores in November.

Chipotle tempered its 2017 forecast to call for new restaurant openings slightly below the low end of the previously disclosed range of 195 to 210. It also said it would open only 130 to 150 new stores next year.

“We’re going to slow down just a little bit, but this is a temporary slowdown for 12 to 18 months,” founder and Chief Executive Steve Ells said in an interview. “You have to get the fundamentals right first. Looking inward and understanding where you made mistakes in the past helps you set up for change.”

The news was a drag on the share price.

“When you reduce the expectations of what the future unit growth could be, it certainly is a negative on the stock,” said Evercore analyst Matthew McGinley.

Sales at Chipotle restaurants open at least 13 months rose 1 percent for the third quarter ended Sept. 30. Analysts, on average, expected a rise of 1.2 percent, according to Consensus Metrix.

Executives said those sales were down more than 2 percent prior to the debut of queso, which is sold as a standalone dip or a sauce for entrees, after an employee-caused norovirus outbreak at a Virginia restaurant in July hurt sales.

Costs included 64 cents related to a data security incident, 19 cents from a spike in avocado prices and 13 cents due to Hurricanes Harvey and Irma. Analysts on average had expected nearly a dollar per share more in earnings, with the consensus target of $1.63, according to Thomson Reuters I/B/E/S.

Chipotle is doubling down on training and menu experimentation after management changes, a board shake up and millions of dollars in free food giveaways failed to revive business following E. coli, salmonella and norovirus outbreaks in 2015.

Chipotle’s stock is down 53 percent from the start of 2015, versus the 75 percent jump for McDonald’s Corp (MCD.N) and the S&P 500’s .SPX 25 percent gain.

More than 18 percent of Chipotle’s float, or shares available for trade, have been sold short. With more than $1.68 billion at risk betting against the shares, it remains the No. 1 short in the restaurant sector, said Matthew Unterman, director at financial analytics firm S3 Partners.

Chipotle has a small menu compared with other chains and it cut spicy chorizo to make room for queso. The chain’s simple, limited menu underpins the fast service that initially attracted customers and Wall Street, but it also carries the risk of diner burnout as the novelty wears off.

Net profit rose to $19.6 million, or 69 cents per diluted share, from $7.8 million, or 27 cents per share, a year earlier while revenue rose 8.8 percent to $1.13 billion.

Reporting by Lisa Baertlein in Los Angeles, Peter Henderson in San Francisco and Uday Sampath in Bengaluru; Editing by Lisa Shumaker

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