Chipotle's Current Environment 'A New Normal,' Says Credit Suisse

Credit Suisse has downgraded Chipotle Mexican Grill, Inc. CMG to Neutral from Outperform, saying the disappointing third-quarter results indicate a further delay in sales recovery.

The company’s third quarter same store sales (SSS) fell 22 percent versus CS/consensus estimate of a decline of 18 percent (per Consensus Metrix). GAAP EPS was $0.27 versus CS/cons. of $1.24/$1.63.

In addition, restaurant margins of 14.1 percent missed Credit Suisse's estimate by 310bps on lower SSS, loyalty program costs, higher marketing spend and rise in avocado costs.

“CMG has seen a solid recovery in its most loyal users (helped by the loyalty program) but still struggles with the larger population of casual consumers, esp. on the coasts,” analyst Jason West wrote in a note.

To counter this, Chipotle is testing national TV ads for the first time and will increase the frequency of new menu items. West said these moves reflect a significant departure from the company’s traditional strategy of simplified menus and limited marketing spend.

“These changes, combined with adjustments to food prep/purchasing to address food safety concerns, suggest CMG has lost a meaningful piece of its core identity,” West highlighted.

Noting that Chipotle’s current environment could be the “new normal,” West slashed his 2016/2017 EPS estimates to $1.14/$8.82 from $2.51/$10.49. The analyst now sees fourth-quarter SSS to drop 3.5 percent versus his prior estimate of 0 percent.

For 2017, the analyst now models 9 percent SSS growth (down from 11 percent upside), 19.3 percent restaurant margins (down from 21.2 percent) and 9 percent EBIT margin (down from 10.1 percent).

West also slashed his price target to $375 from $500, while the shares closed Tuesday’s trading at $405.67. In the pre-market trading Wednesday, the stock fell 3.25 percent to $392.50.