Chipotle Mexican Grill Has To Play Confident In Terms Of FY2016 Guidance

Chipotle Mexican Grill (NYSE: CMG) is scheduled to report its fourth-quarter earnings results on February 2, 2016. ^[1] The company had two completely different stories in the year 2015: the first half with strong comparable store sales and stock rising to an all-time high, and the second half with controversies troubling the investors and the stock tumbling more than 40% to $410. The E.Coli outbreak controversy has certainly hindered the company’s financial progress in the fourth quarter. With the investors already speculating the damage, the stock has tumbled from $722 to $420 in the last three months.

The decline in customer traffic and slowing comparable store sales growth have been the primary concerns for the company over the last three months. The actual impact will be visible when the reports come out. Let us discuss what drivers will be the highlights of this earnings report.

Our price estimate for Chipotle’s stock is $560, which is almost 20% above the current price estimate.

See Our Complete Analysis For Chipotle Mexican Grill

 E.Coli Controversy To Hamper Top-Line Performance

Chipotle, who preaches the concept of ‘food with integrity’ and hygienic food, has gone wrong in their own game. Unfortunately, in 2015, Chipotle’s story was similar to McDonald’s food safety scandal in China in 2014. In fact, it was more severe for a young company whose investors seemed ready to pull out even on slim indications of instability. The cases related to an E.Coli outbreak made Chipotle’s case weaker. (See: Chipotle Mexican Grill: The Story Behind The Tumbling Stock) Although, food companies have recovered from food poisoning incidences in the past without any long-term impact, we believe that, in the current competitive environment and increasing consumer awareness towards food safety, it may take Chipotle much longer to fully recover from the impact of this outbreak.

Not only has this incident affected the customer traffic and comparable store sales growth, but the recovery measures might include various discounts and value meals, which might effectively bring down the average check for the company in the last quarter.

On December 4, 2015, Chipotle released a report mentioning the sales figures and trends so far in the fourth quarter. On one hand, October comparable store sales growth was a positive low-single digit number, whereas, on the other hand, comparable store sales growth for November was -16%, primarily due to the temporary closing of the 43 stores in the two states. ^[2]

Furthermore, the company mentioned that if the trend continues, the food chain might post a comparable store sales decline of -8% to -11% for the fourth quarter. Also, the restaurant level operating margins are expected to drop down to the 22%-24% range, whereas the diluted EPS is expected to be in the range $2.45 to $2.85. Moreover, Chipotle’s officials mentioned that they cannot estimate the impact of this event on the fiscal 2016 comparable store sales growth. However, it is safe to say that, considering the slowing comparable store sales growth every quarter, 2016 will be a tough period for the company in terms of top-line performance. Trefis estimates the customer count to drop by 1% y-o-y in the fiscal year 2015, and further 1.5% y-o-y in the fiscal year 2016.

Guidance Will Decide The Stock’s Fate

It has been noticed in the past that a restaurant company’s revival strongly depends on the guidance for the near-term future. Moreover, Chipotle has always been confident of its sales growth and EPS figures for the coming quarters. The company has been posting strong double-digit revenue growth over the past few years. Inevitably, the investors expect much more from the company. Therefore, the guidance will play a vital role in the initial movement of the stock. A positive guidance figure will be a huge boost for the investors, and might even take the stock over significantly higher in the initial trading hours.

However, by the looks of it, it seems the company may be playing it a little safe and that might go against them. In a recent investors presentation, Chipotle’s officials mentioned that it is going to be a rough period for the company in 2016, in terms of customer traffic and financial figures. The company is preparing for a massive marketing effort in mid-February to entice customers back to the restaurants. While high expenditure on marketing and greater food safety standards would impact margins, gaining back customer confidence and revenues is the primary motive for the company. ^[3]

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More Trefis Research

1. Chipotle Mexcian Grill, FY2015, earnings conference call [↩]
2. Chipotle Mexican Grill, SEC filing 8-K, December 4, 2015 [↩]
3. Chipotle: It’s going to be messy [↩]