(By Mani) It was flying high for the past three years, then it crashed on the ground heavily on a single day. Yes, we are talking about Chipotle Mexican Grill, Inc. (NYSE:CMG), which fell 23 percent or $94 in the past three days.
It all started last Thursday when the restaurant operator announced its second quarter results, which showed better-than-expected earnings on improved margins. However, the culprit was the sales miss and continued drop in the comps growth that failed to touch the double-digit mark as in past few quarters.
When the company guided for a mid-single digit comparable restaurant sales growth for the full year, investors thought enough is enough, and the result is a whopping $3 billion wipe out in market cap in just three days.
The company's second-quarter net profit improved to $81.7 million or $2.56 per share from $50.7 million or $1.59 per share last year. Analysts were expecting earnings of $2.30 a share.
Chipotle's second-quarter sales grew 20.9 percent to $690.93 million, but it still fell short of analysts' estimate of $707.09 million. Comparable store sales, a key measure to gauge retailer performance, were disappointing at 8 percent versus the expected 10 percent. This was the first time since the second quarter of 2010, the comp fell below 10 percent.
The 8 percent growth came from a 4.6 percent increase in price in the second quarter after 4.9 percent hike in the first quarter and higher traffic levels. This represented a deceleration in the two-year trend to up 18 percent from up 25.1 percent last quarter.
April comps were up 10 percent, but trends slowed in May and June due to a dip in consumer confidence. July traffic trends remain at similar levels as the end of the second quarter. Without a significant improvement in traffic, comps could slow to the 3.5–4.0 percent range during the back half of the year due to less price and more difficult comparisons.
"Comps at this level could compress EPS growth and likely the multiple given its lofty status," RBC Capital Markets analyst Larry Miller wrote in a note to clients.
Denver, Colorado-based Chipotle, a burrito and tacos chain spun off from McDonald's (NYSE:MCD) in 2006, opened 55 new restaurants during the quarter, including its first restaurant in Paris, bringing the total restaurant count to 1,316.
Restaurant level operating margin rose 340 basis points to 29.2 percent, driven by leverage from higher average restaurant sales and lower marketing expenses.
The lack of organic growth has triggered investor concerns as the company has been passing the rising commodity costs off to consumers by price hikes. Management cannot do that now as it carries the risk of losing sales to competitors (if not already) as is evident from lower same store sales.
Rival Yum Brands, Inc. (NYSE:YUM) has already rolled out Chipotle's cheaper competitor via its Taco Bell in the form of new Cantina Bell menu and targets the same consumers as Chipotle. Moreover, the menu is getting rave reviews from all corners.
On the other hand, Chipotle currently has no plans for additional price in the near to intermediate term at this juncture. Softer consumer spending and higher food costs may hurt margins in the next few quarters as the company is caught in between the devil and deep sea. If it doesn't rise prices, then it cannot maintain its comps growth and, if it raises prices, then it may see consumers moving to rivals like Taco Bell.
Chipotle, which was once the darling of investors, witnessed a surge in its stock price from barely $40 levels in late 2008 to $440 in April this year. The company has delivered as it has grown its revenues by 19 percent and earnings at 42 percent a year, trumping the restaurant industry average sales of 4.4 percent.
On the valuation front, Chipotle had carried a price-to-earnings ratio of 54.4 times, way higher than the industry average of 21 times as it has been resilient during weak consumer spending periods.
Now, it seems the growth engine has stalled as consumers are not willing to pay more for premium foods and the rising food cost inflation could weigh on the company's results. Moreover, investors should focus on the comp deceleration rather than margin improvement.
Given a bleak outlook, the stock is still expensive as it trades 34 times its 2012 earnings. So, iStock suggests investors exit the stock as there are no signs of a near-term rebound.