Chipotle Fails To Live Up To Even The Lowest Of Expectations

Heading into Tuesday's earnings report, expectations for Chipotle Mexican Grill, Inc. CMG were quite low but the company still disappointed investors based on the stock's 10 percent decline. In fact, Wall Street's consensus EPS estimate fell from $1.75 three weeks ago to $1.62 at the time of the print, Stifel's Chris O'Cull said in a research report.

O'Cull maintains a Hold rating on Chipotle's stock with a price target lowered from $345 to $315 as Chipotle's EPS of $1.33 fell short of the lowered expectations. The earnings miss is attributed to:

  • Lower than expected revenue (3-cent impact)
  • Higher than expected food costs, especially avocado prices (19-cent impact)
  • Two hurricanes (13-cent impact)
  • Write-offs from store closures (9-cent impact).

Slashing Unit Growth

In conjunction with the earnings report, Chipotle said it will slash its unit growth outlook in 2018 from 195-210 in 2017 to 130-150, a move which is "not always the right solution," the analyst said. The company justified its reasoning to slow down store growth so it can better "absorb the new operating strategy and structure, restore emphasis on a strong training culture at existing restaurants, and deliver the high standards guest deserve."

"There have been several restaurant companies make this decision over the past decade, but we cannot think of any that actually benefited from reducing unit growth (unless you theorize what the results could have been if they hadn't reduced openings)," O'Cull wrote.

Bottom line, absent of any evidence that existing stores are seeing signs of improvement, especially positive traffic trends, the market will re-rate Chipotle's stock's valuation lower and growth investors won't "stick around."

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