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Chipotle shares continue their downward spiral

Not even Queso can hide the bad taste the burrito chain has left in investors’ mouths

Chipotle Mexican Grill Inc.’s stock fell by more than 14 percent Wednesday, a day after reporting that its recovery from steep sales declines in 2016 had largely come to a halt. 

The burrito chain’s shares plummeted to a new 52-week low, hitting $273.79 at one point in the day before closing at $277.01, and revisited levels the stock hasn’t seen in five years.

Late Tuesday, Chipotle reported same-store sales of 1 percent for the quarter ended Sept. 30, and executives on the company’s earnings call said that same-store sales were “essentially flat” when revenue deferrals from last year were factored out. On a two-year basis, same-store sales are down 21.1 percent.

Still, the investor reaction surprised some analysts. General sentiment among investors going into Tuesday’s results was to expect some weakness, given two hurricanes, a norovirus incident at a restaurant in Virginia and mixed reviews of the company’s recent launch of queso.

“The numbers weren’t surprising, they were kind of expected,” said Howard Penney, analyst with Hedgeye Risk Management and a longtime Chipotle bear. “The sentiment, it just feels like the sentiment is done, that these people have no idea what they’re doing.”

Chipotle was arguably the best-performing restaurant chain in the country just two years ago. It was generating nearly $2.5 million in average unit volumes, while its primary competitors in the burrito space were doing just north of $1 million.

It was remarkably profitable, with restaurant margins exceeding 25 percent, enabling the chain to pay off a new unit in a year and a half — three is considered something of an achievement in the fast-casual space.

And Chipotle’s stock was one of the hottest on Wall Street, hitting an all-time high of $742.23 per share in July of 2015; some analysts actively speculated that it could reach $1,000.

But a series of foodborne-illness outbreaks at the chain two years ago changed all that and the shares went into an extended free-fall.

Unit volumes in 2016 plummeted 23 percent. Though same-store sales were expected to recover this year, the 1-percent number reported in the most recent quarter means the recovery has stopped cold.

The company launched its much-anticipated queso in the quarter in the hopes of reigniting the brand. Executives on the earnings call Tuesday dismissed weak reviews of the cheesy dip, saying that it generated a same-store sales lift that has continued into October — same-store sales are up in the 2 percent to 3 percent range.

Andy Barish, analyst with Jefferies, said in an interview that investors might have been disappointed that queso didn’t have a bigger impact on the company’s sales.

Chipotle Mexican Grill

“I think it’s a sense of just, maybe some overenthusiasm on the queso launch,” Barish said. “For whatever reason, Wall Street’s enthusiasm or excitement around a single product and how it’s going to be a game-changer. It certainly changed the trend for the better. But it will take a lot more to drive consistently positive same-store sales and traffic. That’s the question mark right now.”

Another problem is uncertainty. The steep slowdown in same-store sales and the performance of queso has made it uncertain when the chain will recover from its 2016 troubles.

“There’s just a question of the recovery and the visibility around getting back to previous levels of average unit volume and profitability,” Barish said. He believes that the company’s decision to slow down its growth could help, but investors do not like the uncertain environment.

For the year, the stock is down more than 26 percent. But it has also lost more than 44 percent of its value since May, when the stock approached $500 per share, as investors grew confident in its recovery. The decline has shed more than $6 billion worth of market cap from the Denver-based fast-casual chain.

The stock is now well below where analysts had expected it to be. The average price target for the stock is just above $350 per share, according to Market Beat. But more analysts are likely to recommend that investors buy the stock — there are nine Buy ratings, compared with five Sell ratings and 21 Hold ratings.

Penney has been a bear on the stock for two years. He first published a short thesis on Chipotle stock nearly two years ago, shortly after the food-safety incidents became public.

He said the company will have “no real earnings growth the next couple of years” and, depending on sales and earnings, he believes it will “find a home around $200 a share, probably.”

“It won’t ever get the support of the Street again until management is gone,” Penney said.

Contact Jonathan Maze at [email protected]

Follow him on Twitter at @jonathanmaze

TAGS: Stock Data
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