Chipotle Shares Tumble as Higher Marketing Costs Erode Margins

(Bloomberg) -- Chipotle Mexican Grill Inc. fell the most in six months as higher advertising and cyber security costs, seen eating into the chain’s margins, sparked a more pessimistic outlook from analysts.

Chipotle shares declined as much as 6.9 percent to $427.09 on Tuesday, the biggest intraday drop since Dec. 6. Through Monday’s close they had gained 22 percent this year, lifted by optimism that the company can bounce back from a string of foodborne illnesses that sickened customers in 2015.

The chain is investing in the “As Real as it Gets” campaign -- Chipotle’s largest ever -- that will include television, outdoor, print and digital advertising, spokesman Chris Arnold said in an email.

On Monday, the burrito chain said in a filing it expects marketing expenses to rise by as much as 0.3 percentage point from the previous three months. The Denver-based company doesn’t anticipate that food costs will change, accounting for about 34 percent of sales.

Chipotle has had to work harder to get customers in the door after the food-poisoning incidents. In addition to the broader advertising campaign, its efforts have included offerings of free food and adjustments to its menu, such as selling dessert. It also offloaded its ShopHouse Southeast Asian Kitchen brand to focus on boosting its core brand.

Malware Attack

Same-store sales began to recover in the most recently reported quarter after declining for five straight periods, raising hope that a turnaround is underway. But it suffered another setback this spring, when a malware attack struck its point-of-sale technology. The company said last month that it had successfully removed the malicious code from its systems.

Chipotle may have to increase its spending on technology and security after the data breach, Maxim Group analyst Stephen Anderson said in a note on Tuesday. Anderson lowered his second-quarter and full-year profit forecast after the company’s announcement on Monday, noting that the attack also could have hurt customer traffic. He has a hold recommendation on the shares.

Telsey Advisory Group analyst Bob Derrington, who has a market perform rating on Chipotle, also lowered his profit projections for the company.

Still, Chipotle reiterated a forecast for same-store sales in the high single digits for the full year. It expects to open as many as 210 new restaurants.

To contact the reporters on this story: Nick Turner in New York at nturner7@bloomberg.net, Leslie Patton in Chicago at lpatton5@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Jonathan Roeder, Lisa Wolfson