'Grainy' Or Not, Queso Might Be The Distraction Chipotle Needs

Chipotle Mexican Grill, Inc. (NYSE: CMG) dipped below the $300 mark Tuesday but has since climbed back to the $315 range after the launch of queso that’s getting burned on social media.

The dip’s “taste/texture is quite different from competitor products,” Mizuho analyst Jeremy Scott said in a Friday note.

The Denver-based chain makes its queso using natural ingredients rather than the typical Velveeta — and critiques have called it “grainy” and “thin,” Scott said.

Mizuho projects a limited short-term repeat rate for queso and chips and Chipotle, but sees the menu item as having potential as a meal ingredient.

“We estimate at least 16.5 percent of NYC customers opted to purchase during our checks, largely as an ingredient, and at current adoption, it’s a 2 percent comp mix benefit.”

Mizuho maintains a Buy and $450 price target on Chipotle (see Scott's track record here).

The firm is modeling a “modest recovery” in AUVs of $2.1 million and a 21.7-percent improvement in restaurant margins by 2019.

Queso: A Welcome Distraction

Chipotle can’t catch a break: rising avocado prices, norovirus outbreaks and, last but not least, rodents raining down from the ceiling at a Dallas restaurant.

Mizuho’s checks showed only 3 percent of Chipotle customers ordered chips with their queso, and more than one-third purchased it on the side.

Even if the lack of thickening and stabilizing agents are leading to unfavorable comparisons, queso is drawing attention away from food safety concerns at Chipotle — “a positive” for the stock, Scott said.

“While the customer reaction is not ideal, the company can leverage the controversy to expand on its ‘as real as it gets’ campaign, help shift the conversation and reinforce its brand message.”

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