Chipotle sales fall short despite free food; stock off 6 percent

By Lisa Baertlein

LOS ANGELES (Reuters) - Chipotle Mexican Grill Inc's free food giveaways to lure back diners after a string of food safety lapses last year failed to revive sales as much as Wall Street expected and its stock dropped almost 6 percent.

Chipotle gave away more than 6 million free burritos and bowls of food during February and March as well as nearly 1 million free orders of chips and salsa or chips and guacamole, Chief Financial Officer Jack Hartung said on a conference call with analysts.

Executives added that they plan to move away from free food and towards buy-one-get-one-free offers and deals that reward customers for frequent visits.

 

During the first quarter, Chipotle's sales at restaurants open at least 13 months tumbled 29.7 percent, more than the 28.4 percent drop targeted by analysts polled by Consensus Metrix.

Shares in the burrito chain have lost about one-third of their value since food safety woes surfaced with news it had closed dozens of restaurants in the Pacific Northwest due to an E. coli outbreak. The stock was down 5.8 percent at $420 in extended trading on Tuesday.

The Denver-based chain also reported its first quarterly loss as a public company. Its net loss of $26.4 million, or 88 cents per share, was less steep than the 95 cent per-share loss analysts had expected, according to Thomson Reuters I/B/E/S.

Chipotle's restaurant level operating margin was 6.8 percent, down from 27.5 percent in the year-earlier quarter, as weak sales, and costs related to food giveaways, safety testing and waste dinged results.

The company has sent out millions of coupons for free food, promotions potentially valued at more than $62 million.

Bearish analysts have warned that such freebies could train diners to hold out for gratis grub, while bulls say they are convincing diners that it is safe to eat at the chain following last year's food safety lapses, which included outbreaks of E. coli, salmonella and norovirus.

The company expects loyal customers to resume their Chipotle habits, but the chain's founder and co-Chief Executive Steve Ells on March 16 estimated that 5 percent to 7 percent of infrequent customers may never return.

(Reporting by Lisa Baertlein in Los Angeles; editing by Andrew Hay)