Is Queso The 'Golden Bullet' Chipotle Investors Hoped For?

If Twitter Inc (NYSE: TWTR) and Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL)'s YouTube reviews mean anything, Chipotle Mexican Grill, Inc. (NYSE: CMG)’s new queso is “trash,” its flavor “chalk” or “dog food,” its consistency “soup.”

So if you thought a little extra cheese could cure Chipotle’s same-store-sales woes, you might be in for a letdown.

“We suspect that recent performance of Chipotle's SSS initiatives (e.g., Queso) and marketing effectiveness is likely to disappoint expectations,” RBC Capital Markets analysts David Palmer and Eric Gonzalez wrote in a Friday note.

Again With The Avocados

Ahead of Chipotle’s earnings report, which should reveal more about the firm’s future in queso, RBC maintains a Perform rating on the stock but lowered its price target from $400 to $330 and its 2017 earnings per share estimates from $7.54 to $7.25.

Based on higher avocado prices, lower sales expectations and higher labor costs, the analysts expect to see a slow in SSS growth during the second half of the year and through 2018. They lowered third-quarter growth forecasts from 2.5 percent to -1 percent but predicted an ad-driven acceleration of 3 percent in the fourth quarter.

A New Big Stink

The end-of-year sales boost could be driven by price hikes.

“Our guess is that a weaker than expected queso launch will not deter Chipotle from raising prices by year-end in select markets where it believes customers will absorb the increase with minimal pushback,” Palmer and Gonzalez wrote.

Gradual increases are expected to drive a total 2- to 3-percent surge. In April, Chipotle raised prices 5 percent in 20 percent of stores and reported positive reception.

At the time of publication, Chipotle traded at $322.66.

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Image Credit: Screengrab from YouTube