March 15, 2016 / 8:39 PM / 2 years ago

Chipotle sales worse than expected in Feb, first-quarter loss seen

(Reuters) - Chipotle Mexican Grill Inc’s (CMG.N) turnaround timeline appeared to lengthen on Tuesday after the burrito seller reported a steeper-than-expected slide in February sales at established restaurants and warned that it will post its first quarterly loss as a public company.

Chipotle Mexican Grill is seen in uptown Washington, February 8, 2016. REUTERS/Carlos Barria

The news sent shares down 3 percent to $488 in extended trading.

Chipotle’s February sales at restaurants open at least 13 months dropped 26.1 percent in February, more than the 23 percent fall expected by analysts polled by Consensus Metrix.

Those sales have been battered by a series of food safety lapses last year. They improved during February and the first week of March but decelerated again after Chipotle closed a Boston-area restaurant because of a norovirus scare. No customers were sickened, but the news fanned concerns about Chipotle nationally.

Its forecast for a first-quarter loss of $1 or more per share was fresh evidence of the difficulties the chain faces as it works to repair its reputation in the wake of Chipotle-linked E. coli, salmonella and norovirus outbreaks during 2015.

The formerly high-flying company’s recovery “is going to be more drawn out than we expected,” said Morningstar analyst RJ Hottovy. “They’re finding it more costly to manage this situation than they anticipated.”

Costs related to its food safety stumbles are hitting virtually every expense line at Chipotle, undercutting its well-known ability to hold down costs while cranking out higher sales.

To that end, the company forecast a first-quarter restaurant-level operating margin in the mid-single digit percentage range. Restaurant-level operating margin was 19.6 for the fourth quarter.

Chipotle sharply increased giveaways in February, mailing and texting coupons for free burritos. Increased promotion costs, higher food costs due to new food safety protocols, and higher labor costs to staff up as customers redeemed burrito coupons all weighed on the quarter, it said.

“They’re giving away so many free burritos that they’re losing money,” said Howard Penney, who covers Chipotle for Hedgeye Risk Management. Beyond that, he warned, “you’re training people to wait for more free food.”

Legal issues associated with food safety also are weighing on Chipotle. Related costs will rise due to a previously announced investigation by the U.S. Department of Justice, Chipotle said.

Chipotle also said it hired former Kansas State University food safety and security professor James Marsden as the executive director of food safety.

Reporting by Yashaswini Swamynathan in Bengaluru, Lisa Baertlein in Los Angeles and Peter Henderson in San Francisco; editing by Bernard Orr and Grant McCool

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