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For Chipotle, Concerns That Queso Isn't Connecting With Consumers

For Chipotle, Concerns That Queso Isn't Connecting With Consumers
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Investors who previously hoped the introduction of Queso to Chipotle Mexican Grill, Inc. (NYSE: CMG)'s menu offering would help improve traffic and boost the stock higher may want to reconsider, according to analysts at Wells Fargo.

Analyst Jeff Farmer thinks queso just may not be connecting with consumers right now.

Chipotle's earnings results are scheduled for Oct. 24 and the company is modeled to report a 0.2 percent decline in same-store sales, which is notably below the Street's consensus estimate of a 2.0 percent same-store sales gain, Farmer commented in a report. While the September launch of queso did drive a positive same-store sale boost late in the quarter, it wasn't enough to offset the negative trends, including a recent string of bad publicity from another case of food-borne illness.

Nevertheless, Chipotle's same-store sales are modeled to improve into positive territory in the fourth quarter at 1.3 percent, although this is also below the Street's forecast of 2.2 percent. However, this may mark the beginning of a "new norm" for Chipotle as its longer-term same-store sales run rate has been reset to a low single-digit range.

Chipotle's third quarter earnings report is likely to offer a glimpse into 2018 and may include slower growth of new store openings of 140 to 160 units versus 195 to 210 in 2017, a low single-digit same-store sales guidance, and low-single-digit commodity inflation.

Bottom line, investors will find it more difficult to continue justifying a premium valuation for Chipotle's stock, especially if the third quarter earnings report proves to be a disappointment.

Farmer maintains a Market Weight rating and $290 price target on Chipotle's stock.

Related Links:

Queso Fail, Other Headwinds Lead This Analyst To Remain Cautious On Chipotle

A Case For Why Chipotle Shares Could Fall Below $250

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