Chipotle Stock Might Rise After Panic Subsides
Was the 8% drop in the CMG stock after the Q3 earnings release, a fair reflection of Chipotle Mexican Grill’s (NYSE:CMG) year to date performance or prospects? Or was it just another panic selling by investors?
Despite a positive performance by Chipotle Mexican Grill in its third quarter results, the stock price went tumbling down 8% from $706 to $651 in the first trading hours after the news release.
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The slowness in the comparable sales growth and a dull guidance for the fourth quarter instilled negative sentiments among the investors. The company’s sales growth fell to as low as 2.6% compared to roughly 20% growth the same period last year. [1] Despite the claims that Carnitas will return back to all the impacted restaurants by the end of November, the company expects similar comparable sales growth in Q4 2015 as it was in Q3. Moreover, the guidance for comparable sales growth for fiscal 2015 is low-to-mid single digit growth, and continued lower growth in 2016. We believe that the stock might have over-reacted to the results, and has the potential to revive back to normalcy, once the Carnitas situation subsides. Here’s why:
Trefis has revised its price estimate for the company to $682, which is still 5% above the current price.
See Our Complete Analysis For Chipotle Mexican Grill
Growth Slowness Should Have Been Anticipated
CMG has been one of the most volatile stocks in the industry over the past 18 months, and perhaps, it is justified, considering that the company has been an outperformer for almost all the quarters over that period. The fast casual restaurant segment has been attracting customers more than any other segment in the food industry. Chipotle has been delivering solid positive revenue growth and comparable sales growth for all the quarters over the past 3 years.
Last year, Chipotle delivered some excellent sales growth figures, with 20% growth in the third quarter of the fiscal 2014, its highest ever. Clearly, this year’s Q3 was facing the toughest comparison. Nevertheless, the company managed to post 2.6% growth on top of last year’s growth, making next year even tougher for the company. The point, which everyone seems to miss, is that Chipotle’s revenue growth is far greater than any one of the top restaurant companies; Chipotle’s net revenue has grown 81% over the last 4 years from $2.27 billion in 2011 to $4.1 in 2014.
This is, from any angle, not a small achievement, especially in an extremely competitive industry. Moreover, since comparable sales is the amount of revenue generated by a store over the period, relative to what it generated in a similar previous period, the growth sometime had to slow down. In 2014, Chipotle’s stores generated net revenues of $2.3 million per restaurant, which is comparable to McDonald’s $2.7 million per company operated restaurants. So it would be somewhat safe to say that the comparable sales growth is a difficult task for any company from here on.
Furthermore, this slowness was expected, considering there was a Carnitas shortage in most of the restaurants with high footfall. Even though, Chipotle added a new pork supplier, Karro Food Group of the U.K., which started serving pork to the company’s restaurants in Florida in July, it was towards the end of the third quarter when the pork supply was restored to as much as 90% of the affected restaurants. [2] In short, the growth slowness was not a surprise, at least not big enough for an 8% price drop.
Things Might Get Better In Q4
Chipotle mentioned that it raised menu prices for its steak and barbacoa items, due to inflated beef prices, and it contributed roughly 70 basis points to the comparable sales. Moreover, the company plans to take this menu hike in its fourth quarter as well, and expects this decision to boost the comparable sales by 130 basis points in Q4. (Ref:1) On the other hand, the company’s dinner hour transactions increased by 1, whereas the non-peak hour transactions increased by nine transactions.
Furthermore, the company also mentioned that the return of Carnitas might bring back the traffic count that fell in the months of August and September. Carnitas is one of the most popular items on Chipotle’s menu, and one of the most expensive items on the list as well, and its return might actually have a positive impact on the revenue growth in the fourth quarter.
Trefis estimates the Chipotle’s average check to increase by 2% year-over-year (y-o-y).
Additionally, Chipotle already has low expectations in terms of comparable sales in the fourth quarter. Looking at the behavior and reaction of the investors in the past, it is safe to say that even a slightly better performance might drive the stock.
Restaurant Development Picks Up Pace
During the third quarter, the company opened 53 new restaurants, taking the total to 150 restaurants for the fiscal 2015. (Ref:1) With this accelerated pace, the company has raised its full year guidance for restaurant openings from the previously expected range of 190-205 to the new range of 215-225. Moreover, Chipotle expects to open 220-235 restaurants in the fiscal year 2015.
On the other hand, Chipotle opened its 7th store in London, which is more of a lunch-driven area. The company’s stores in a similar location- Chicago- received huge footfall in its initial months and are now among the highest revenue generating stores. Additionally, the company also opened its 4th store in Paris. Apart from traditional Chipotle stores, the company has also been focusing on its two other brands: ShopHouse and Pizzeria Locale. Kansas City got its first Pizzeria Locale store, making it the second market for the brand. Chipotle plans to open two more Pizzeria Locale stores in Cincinnati in the coming few months.
Clearly, the restaurant openings have picked up pace for the company, and with more expansion opportunities, we might see further increased pace. Trefis estimates the number of Chipotle stores to reach close to 2,000 by the end of this year.
To summarize, the company has a lot of positives to look forward to in the coming quarters, and we might see the stock rising once some time has passed and some answers to questions have been made clearer.
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