What’s Next for Chipotle?
Shares of Chipotle Mexican Grill (NYSE:CMG) fell over 8 percent in morning trading on Wednesday before cooling off to more modest losses of about 5.6 percent. Investors jumped ship after the company announced preliminary results for the fourth quarter, which suggest a weak end to the year and continued troubles in 2013.
Chipotle is expecting fourth-quarter earnings in the range between $1.92 and $1.97 per diluted share, below the $2.09 that analysts were looking for. However, the company is expecting revenue to climb 17.2 percent to $699.2 million, ahead of estimates for $690.86 million.
Comparable restaurant sales are expected to increase 3.8 percent, but restaurant-level operating margins are expected to fall 150 basis points year over year to 24.6 percent. This is partially due to a a 130 basis-point increase in the cost of food, which is expected to sit at 33.5 percent of sales.
Analysts, clearly unhappy about the decreased earnings projection, threw up a number of red flags on Wednesday. Consensus seems to be that the restaurant’s tremendous growth rate can’t be sustained, and its premium valuation is no longer supported…
A look at earnings
At a glance, it’s apparent that Chipotle’s top- and bottom-line momentum has been losing some steam. The company is trading at a trailing-twelve-months price-to-earnings of 32.62, and a forward P/E of 26.93, making it more expensive that competitors like Panera (NASDAQ:PNRA) — trailing P/E of 29.86, forward P/E of 23.16 — and way more expensive than industry giants like McDonald’s (NYSE:MCD).
|Quarter||Sep. 30, 2011||Dec. 31, 2011||Mar. 31, 2012||Jun. 30, 2012||Sep. 30, 2012|
|Revenue ($) in millions||591.85||596.75||640.60||690.93||700.53|
|Diluted EPS ($)||1.90||1.81||1.97||2.56||2.27|
Chipotle pretty much had a four-year rally heading into 2012 that justified every penny of its high valuation, but a series of blows in 2012 have caused a lot of investors, including David Einhorn, to turn around and question the company’s growth. As a result, the stock price has crashed year over year…
Once trading comfortably above $400, the stock now seems to be finding resistance around $300. Shares are off nearly 16 percent year over year, and recent trends suggest that early 2013 won’t grant the company any slack. Unfortunately, the company found its self in a position it couldn’t maintain, and now modest growth isn’t enough to keep shareholders happy.
In order to try to turn some of that negative sentiment around, the company is piloting a catering service in Colorado. Something similar has worked out well for Panera, but there is initial skepticism that the service will play out the same way for Chipotle.