Chipotle Mexican Grill, Inc. (NYSE:CMG) bounced off a five-year low to start November and that might tempt investors to think the worst is over for Chipotle stock.
It’s probably not.
The fast-casual restaurant chain is doing everything it can to win back customers put off by an outbreak of foodborne illness. And yet two years later — despite spending millions on free food — sales continue to languish and margins continue to sink.
It’s possible that an outbreak of foodborne illness is much harder for a restaurant chain to overcome in the social media era. CMG’s failure to get a grip on same-store sales results sure makes it look like it. It’s hard to be optimistic until Chipotle Mexican Grill can stem the bleeding in this critical retail industry metric. Based on last quarter’s results, it’s not even close.
Same-store sales — or sales at stores open more than a year — dropped 21.9% in the third quarter. Analysts forecast a lesser decline of 18.2%. Naturally, transactions slumped more than 15% over the three month period as well.
The good news is that the rate of decline has abated somewhat. Third-quarter figures compared favorably with the near-30% drop in Q2. The bad news is that they missed exceptions and are still falling.
The dismal same-store sales news came with a worse-than-expected earnings report that was ugly across the board. Take a look at these numbers and see if there’s any evidence of a turnaround: Profits fell 95% year-over year; revenue declined 15%; marketing costs doubled as percentage of revenue and operating margins fell by more than half.
Complicating matters, Chipotle stock is exhausting investors’ patience and that has attracted short sellers. Roughly 20% of the float is sold short and it has been ticking up since the earnings news.
CMG Stock Is Too Risky for the Potential Reward
Chipotle stock has done a nice job bouncing off a multi-year low, but it has a long way to go before mounting a challenge to resistance at its 50-day moving average. CMG stock currently trades around $378 a pop, but that key level resides closer to $434. That’s a 15% gain from where Chipotle stock is now. Also, keep in mind that it came up against resistance at that technical level at the end of March.
And even if CMG stock manages to hurdle the 50-day moving average, the next challenge is even tougher. Shares have been trapped under their 200-day moving average since late 2015. The stock tried to a breakout less than a month ago but came up against resistance. That technical level could prove to be insurmountable until the market sees actual progress in its recovery.
Chipotle Mexican Grill also happened to be oversold when it bounced off the low set a week ago. It was practically begging for a reversal. That condition no longer applies to CMG stock.
Chipotle stock is now off more than 20% for the year-to-date and 50% from an all-time high set in the summer of 2015. It’s hard to find a lot of momentum in this name.
Analysts’ average target price stands at $407, which gives CMG implied upside of just 7% in the next 12 months or so. That’s a hold in pretty much every analyst’s book. Indeed, of the 37 of them covering the stock, 11 have Chipotle Mexican Grill at buy, 19 have it at hold and seven say it’s a sell. That’s a lot of sell recommendations. Analysts rarely hand them out.
There’s nothing wrong with studying CMG stock as a potential beaten-down bargain play. If it can someday turn its fortunes around, today’s prices will prove to be an outstanding entry point.
Unfortunately, that day looks to be farther off than ever.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
