Chipotle Shares Lower As Wedbush Downgrades To Underperform

Wedbush’s Nick Setyan downgraded the rating on Chipotle Mexican Grill, Inc. CMG from Neutral to Underperform, while lowering the price target from $450 to $400.

Growth Trajectory Unclear

Setyan explained that the downgrade was based on the belief that the “current valuation reflects an overly optimistic outlook regarding Chipotle’s path to recovery.”

For AUVs to recover to the TTM seen in Q3:15, of over 2.5 million, by 2018, the company would need a continuously accelerating three-year traction growth trajectory.

However, based on the most recent sales disclosures, there is currently no visibility into a trajectory for sales recovery going forward, especially in the absence of promotional activity.

“Even with modest commodity inflation, we see labor and other operating expenses eroding margins by 440 bps through 2018 from pre-outbreak 2015 levels,” Setyan stated, while adding that the “inclusive of the 200 bps of incremental COGS due to increased safety measures” could lead to margin erosion of more than 600 bps.

Gradual Rebound

Setyan expects Chipotle Mexican Grill’s traffic to gradually rebound through 2016, driven by increased near term marketing.

“While we remain skeptical other material transaction drivers will emerge in the near term, and question the sustainability of a transaction recovery absent couponing and giveaways, we model transactions turning positive by Q4:16 and remaining positive in the HSD/LDD range through 2018,” the analyst added.

The EPS estimates for 2016 and 2017 have been lowered from $7.07 to $4.12 and from $12.93 to $10.68, respectively.