Street Mixed On Chipotle's Poor Sales, Encouraging Comps

Shares of Chipotle Mexican Grill, Inc. CMG plunged as much as 8 percent after the company reported lower-than-expected comps for February and warned of a first-quarter loss.

The company warned of a loss in the first quarter, while analysts were expecting earnings of $0.08 a share for the period.
"We expect EPS will be a loss of $1.00 per share or worse," the company said in a regulatory filing.

The company provided an update on its restaurant level margins for first quarter, which are now expected in the mid-single digit range, due to higher marketing and promotion spend and higher than anticipated food and labor costs.

Chipotle also announced the hiring of James Marsden as Executive Director of Food Safety to help navigate the ongoing food safety concerns surrounding the company.

What's The Street Think?

However, Wall Street is mixed on the latest sales results of Chipotle, which showed 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. The same-restaurant sales missed consensus estimate of 23 percent drop.

Maxim's Stephen Anderson downgraded the stock to Sell from Hold, while lowering the price target by $100 to $350.

"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.

However, Piper Jaffray's Nicole Miller Regan maintained an Overweight rating, with a price target of $590.

While still early, the analyst expects Chipotle to be able to achieve fairly steady improvement in same-store sales trend through the year.

Regarding the 1Q16 trends, the company announced a steady improvement in same-store sales from the decline of 36.4 percent in January to 26 percent in February and 21.7 percent in the first week of March.

"We maintain that leverage exists "when" (not "if") trends improve as the underlying unit-level economics of the business remain solid despite currently (and severely) negative same-store sales trends," Regan wrote in a note.

Meanwhile, SunTrust Robinson Humphrey's Jake Bartlett reiterated a Buy rating on Chipotle, while raising the price target from $520 to $550.

Although the company's February same-store sales and 1Q16 EPS guidance were both lower than estimated, Bartlett expects investors to "take a longer-term view on valuation given recovering (albeit slowly) sales."