Let's Cut To The Cheese: After Sluggish Q3, Chipotle Still A 'Show Me' Story

Despite a more than 10-percent decline in Chipotle Mexican Grill, Inc. (NYSE: CMG)'s stock in reaction to a disappointing earnings report, not all of Wall Street are ready to throw in the towel...yet. UBS analyst Dennis Geiger maintains a Neutral rating on Chipotle's stock with an unchanged $345 price target.

Chipotle's third-quarter earnings report fell short of expectations across various metrics. For example, same-store sales trends in the quarter were "sluggish" and management reduced its new 2018 store openings to just 130 to 150 units from 2017's guidance of 195 -210 units due to uncertainty surrounding sales initiatives.

It's likely Chipotle is experiencing "deteriorating" new unit open trends and cannibalization which implies a "more tempered approach" to growth is an appropriate strategy, Geiger said. While management suggested its 2018 unit growth profile of around 5.5 percent is a temporary measure, it's just shy of the 6 percent longer-term growth profile the analyst is modeling.

Meanwhile, Chipotle's fourth-quarter trends to date, including a 2 to 3 percent same-store sales growth and a 4 to 5 percent contribution from queso plays favorably into the "show me story", the analyst said. This is particularly "encouraging" after several reports suggest the initial feedback from the queso offering is negative.

Other positive initiatives in place include:

• Improving operations and the guest experience;
• Improvements to digital and catering;
• Menu innovation; and
• Incremental pricing of 5 percent in 900 stores.

Bottom line, investors have reason to "remain cautious" on future sales growth, but improvements are very much in place and ongoing. As such, the stock remains a "show-me story for now."

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Image credit: Steven Depolo, Flickr