It's Very Difficult To Have Conviction In Chipotle Right Now: Stephens

Will Slabaugh of Stephens expects a material and ongoing structural change to the margin profile of Chipotle Mexican Grill, Inc. CMG and said it is very difficult to have conviction on the stock at the current valuation. According to a note from Slabaugh, "We have little doubt that CMG will return to positive SSS growth by 4Q16 or 1Q17. However, the previously impressive gap of CMG guests counts per store vs. the industry likely closes as marginal customers move elsewhere and frequency of core customers slows over time (i.e., it will be tougher for CMG to return to peak guest counts given large previous gap vs. industry)." In addition, the analyst warned: "The estimated 200+ bps headwind from food safety measures could grow if sales are slower to recover than anticipated or costs continue to come in above plan (as is being seen in 1Q)." The analyst continued: "Marketing spend is meaningful for the first time in 1Q, as well as BOGOs and other promotional activity. We think it will be difficult to fully dial this back down to previous levels without a traffic impact (i.e., it likely isn't fully dialed back)." "Labor inflation remains high for the industry, and CMG likely won't be in a position to raise prices through 2017. Wage growth could outrun pricing potential, further pressuring margins," Slabaugh added. Meanwhile, the analyst there is a large gap between possible outcomes for FY17 and FY18 EPS. According to the analyst, this gap primarily hinges on the following inputs: "1. Does marketing costs dramatically fall after 1H16 or does it become a recurring and necessary spend?" "2. Can CMG return to its pre-foodbourne illness guest counts per store or has the marginal customer moved on?" "3. Do labor, occupancy, and other store-level costs rise too fast before CMG is able to take pricing to offset?" "4. Does CMG have pricing power in today? FY17? FY18?" "In our view, these points make it very difficult to have a high degree of confidence around our or Street estimates and, therefore, very difficult to invest with conviction at this historically high valuation—even on our FY18 EPS," Slabaugh added. Slabaugh has an Underweight rating and $375 target price on CMG shares, which were down 0.31 percent to $449.86. The stock fell 41 percent from its 52-week high of $758.61.