BANK OF AMERICA SAYS CHIPOTLE PAYS WORKERS TOO MUCH, DOWNGRADES ON CALL
Wall Street seems to have an issue with labor having almost functional wages. In yet another instance of this being perfectly clear, Bank of America downgraded Chipotle and also cut its earnings targets for 2018 as well as 2019. The rationale is that Chipotle won’t be able to cut labor costs any further, meaning that their rateable value is dependent on screwing their workers. It appears that Bank of America is engaging in some subtle gymnastics to qualify this position, despite some of Chipotle’s recent public service issues.
CHIPOTLE PENALIZED FOR POSSIBLE LABOR FRIENDLY PRACTICE?
There is always a variance in understanding numbers when it comes to earnings reports, both in terms of the surface summaries and in the gnitty gritty details. All too often a defined number in a confined context is somehow perceived as different, if not the inverse of the value. These interpretations have a cascade effect when it comes to the wire, trades, and the resulting change in stock values. The case of Chipotle being downgraded by Bank of America could be such a variance, but it looks a bit more like policy shaping analysis. One could even argue that Chipotle is being penalized for offering higher wages to its employees in the marketplace.
ANALYST HARD SELL OR OBTUSE READ ON LABOR HOURS?
“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 wrote in a note last week. “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.”
The average weekly hours for both full- and part-time Chipotle crew members had been cut from a high of 34.6 in 2006 to 21.7 in 2016, according to Bank of America’s report. Chipotle spokesperson Chris Arnold disagreed and told CNBC in an email that, quite the contrary, it had increased hours.
CHIPOTLE REP SAYS ANALYST ERRED, TOOK 12-YEAR READ ON STAFFING HOURS
“We absolutely have not cut hours. In fact, we have recently increased scheduled hours for our crew so that our teams would be ready to prepare and serve our new queso. The Bank of America analysis is making estimates and conclusions about our management practices over a 12-year time frame and the scale of our business and labor wages have changed dramatically over that time.”
The analyst at Bank of America slashed his 2017 earnings estimate to $7.40 from $7.60, and lowered his 2018 estimate to $9.50 from $10.50. Yet, shares of Chipotle have risen nearly 10 percent over the past month, but still remain down over 12 percent this year.
By late morning, shares dropped 2 percent following the downgrade.
Chipotle has been testing new products and initiatives to push traffic to its restaurants after its struggles with food safety outbreaks and the subsequent setbacks. Chipotle recently launched its own queso nationwide due to growing competition from California-based Del Taco.