5 outbreaks in 6 months will do that: Chipotle sales tank in Q1

USA Today reports that Chipotle posted a double-digit sales decline in the first quarter as the fast-casual restaurant chain works to restore its reputation after a spate of food-related illnesses hit its stores last year.

chipotle.burrito.vomitChipotle was dealt a swift blow when multiple instances of E. coli and norovirus shut down its stores and scared off customers starting last fall. The outbreaks prompted Chipotle, which built its reputation on preparing fresh food directly in stores, to adopt new food-safety policies and move more of its food preparation to a central kitchen, where it’s also testing certain ingredients for diseases.

In the earnings report out Tuesday, Chipotle said food costs accounted for more than 35% of revenue  in the quarter ended March 31, driven up by food-testing protocols and increased costs for pre-cut produce. That means for every dollar going into Chipotle’s cash registers, it spent about 35 cents on food costs.

The company has been investing heavily in marketing and promotions to entice customers back to stores. Promotional and marketing expenses totaled $55 million in the quarter, Chief Financial Officer Jack Hartung said on a conference call. The efforts appear to be working. Executives said on the call Tuesday that the company gave away more than 6 million burritos or burrito bowls in February and March. A mobile campaign offering free burritos to make up for the day Chipotle closed stores temporarily in early February to hold an all-staff meeting on food safety had a 67% redemption rate, said co-CEO Steve Ells.

diarrheaSales at stores open at least a year fell nearly 30%, and restaurant transactions fell more than 21% as Chipotle reeled from the fallout of the food-safety issues — although transaction volume improved as the quarter went on. While the promotions seem to be resonating with new customers, executives said the company is still working to get its formerly most loyal eaters back in stores.

Chipotle said total sales came to $834.5 million, down 23.4% from $1.1 billion in the year-ago quarter. That was well below analyst expectations for revenue of $863.2 million, according to S&P Global Market Intelligence.

Chipotle shares fell about 5% in after-hours trading on the news.