Maxim Says 'Not So Fast' On Chipotle, Downgrades To Sell

Maxim’s Stephen Anderson downgraded the rating on Chipotle Mexican Grill, Inc. CMG from Hold to Sell, while lowering the price target from $450 to $350.

Sales Decline

The company reported a decline in same restaurant sales of 26.1 percent in February, along with a 24.4 percent decline in the first two weeks of March. This was significantly worse than the estimates of 18 percent and 15 percent decline, respectively.

Anderson now expects the 1Q16 comp to decline 28.6 percent, from the earlier estimate of a 23 percent decline.

“In light of ongoing food safety concerns, our belief that management will need to "buy sales" over an extended period, and potential legal risk from the ongoing Federal criminal probe, we argue that earnings visibility will remain limited into 2017E,” Anderson pointed out.

High Investments Needed

Checks suggest that traffic had started to show a slow recovery, partly driven by the free burrito giveaway in the latter half of February and the milder than usual weather.

However, once the giveaway ended, especially following the norovirus outbreak at the Billerica, MA, restaurant, some of the traffic gains reversed.

“As we believe that CMG is more vulnerable to headline risk than we had expected, we now caution that CMG faces an extended recovery period in which positive comps are unlikely until 2017E,” the analyst stated.

Anderson now believes that the company would need to continue to make high investments in SG&A and food safety through the end of 2016, and possibly into 2017 as well.