Chipotle has a new problem on its hands: It's paying its employees too much.
Bank of American Merrill Lynch downgraded Chipotle and cut its earnings targets for 2018 and 2019, saying the struggling restaurant chain will have trouble cutting back labor costs any further than it already has.
"We are downgrading Chipotle to Underperform from Neutral as we believe, assuming no significant tax reform, that 2018 and 2019 consensus EPS needs to drop at least 10 percent," analyst Gregory Francfort write in a note Wednesday. "We believe further gains from trimming hours will prove difficult which limits the opportunity to get labor below 27 percent of sales even if traffic recovers."
Chipotle has taken definitive steps to scale back its labor costs as sales decline. The average weekly hours for full- and part-time Chipotle crew members were cut from a high of 34.6 in 2006 to 21.7 in 2016, according to the report.
The analyst slashed his 2017 earnings estimate to $7.40 from $7.60, and lowered his 2018 estimate to $9.50 from $10.50. Shares of Chipotle have risen nearly 10 percent over the past month, but remain down over 12 percent this year.
By late morning, shares were down 2 percent following the call.
The company has been testing new products and initiatives to drive traffic to its restaurants after its struggles with food safety outbreaks and subsequent setbacks. Chipotle recently launched its own queso nationwide due to growing competition from California-based Del Taco.
—CNBC's Michael Bloom contributed to this report.
hesh582 on October 18th, 2017 at 17:46 UTC »
This is so misleading.
They aren't concerned that Chipotle offers wages that are too high.
They are concerned that labor costs as a percentage of sales are too high.
Those are related but still very different things.
In the food service industry, every restaurant from your mom and pop coffee shop to a major chain is looking at two numbers: Cost of goods and Cost of labor. Those two things as a percentage of sales are basically all that matter.
High cost of labor often doesn't even have much to do with how much you pay your employees! Usually it comes down more to inefficient scheduling or too much turnover and thus too many dead weight trainees. Chipotle could pay their employees jack shit and still have cost of labor problems if they had too many employees on at off hours.
It's also telling for a different reason utterly unrelated to wages - it's the more fixed cost. A restaurant can just order less food when there is less business. It's much hard to just employ less staff on a whim. Suddenly spiking labor costs can indicate that there are revenue problems.
elshizzo on October 18th, 2017 at 17:14 UTC »
This is why it annoys me so much when people point to the stock market as a sign of how good the economy is doing.
A lot of things that are good for society are bad for stocks. Paying employees well is one of them.
NewClayburn on October 18th, 2017 at 16:58 UTC »
It's almost like Chipotle wants to exist in five years.