Chipotle freebies fail to overcome food safety fears; shares fall

By Lisa Baertlein

LOS ANGELES (Reuters) - Chipotle Mexican Grill Inc reported its first ever quarterly loss, after food giveaways failed to lure back large numbers of paying customers turned off by a string of food safety lapses last year.

Shares of the Denver-based burrito chain fell almost 5 percent after the first quarter results.

Sales at established Chipotle restaurants fell 29.7 percent during the quarter as the company gave away over 6 million free burritos and bowls of food as well as nearly 1 million free orders of chips and salsa or guacamole, Chief Financial Officer Jack Hartung said on a conference call with analysts.

He said Chipotle plans to move away from freebies and towards buy-one-get-one-free offers. It is also planning deals designed to get its most loyal customers to return as frequently as they did before the food safety crisis, which included outbreaks of E. coli, salmonella and norovirus.

"While Chipotle claims that its sales are on a gradual path to recovery, the results from the first quarter of its new fiscal year suggest otherwise," said Hakon Helgesen, retail analyst at Conlumino.

Shares in Chipotle 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 4.8 percent at $424.76 in extended trading on Tuesday.

Sales at established restaurants are down about 26 percent so far in April. They bottomed in January, tumbling 36 percent that month.

The chain reported a net loss of $26.4 million, or 88 cents per share, as weak sales and costs related to food giveaways, safety testing and waste dinged results. The loss was less steep than the 95 cent per-share shortfall analysts had expected, according to Thomson Reuters I/B/E/S.

"I would not expect a loss in the second quarter," Hartung said, noting that the company expects costs to ease.

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

Bearish analysts have warned that such deals 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.

Still, executives have conceded that Chipotle may never fully recover. Company 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)