Chipotle Mexican Grill, Inc. (NYSE:CMG) has become a punching bag ahead of Tuesday’s earnings as analysts continue to issue negative commentary on CMG’s prospects for recovery.
CMG stock is off about 15% for the year-to-date, and although it has stopped falling, neither can it get going again. Shares have been trading in a $50-range since spring because the fast-casual restaurant chain can’t seem to get any traction after that little incident where it gave violent diarrhea to customers across 14 states.
The killer worry is that same-store sales — a critical retail metric — aren’t recovering nearly fast enough. And that’s despite Chipotle making big investments in marketing, such as free food.
It increasingly looks like outbreaks of foodborne illness are much harder for a chain to overcome in the social media era. Intuitively, at least, it makes sense. And every time CMG struggles with same-store sales, it adds more anecdotal evidence to the case.
If there’s a silver lining it’s that the rate of Chipotle’s same-store sales decline slowed down from the first quarter to Q2. The cloudy part is that they still fell nearly 30% in the first quarter and 24% in the second. The most recent quarter is expected to show progress on this front. The average forecast has CMG reporting a same-store sales decline of 17.5% — but it can’t be denied that Chipotle is still in a deep hole.
Not All Analysts Can Stomach CMG Stock
Even analysts who rate Chipotle stock at “outperform” (buy, essentially) point to the lack of revenue momentum. From a Wells Fargo Research note to clients:
“While we don’t claim to know the direction in which Chipotle will take its top-line strategy going forward – we believe management recognizes that more of the same (free/discounted food, mobile and direct mail promotions, loyalty program) is unlikely to produce a different result. Chipotle’s consumer research indicates that its promotional efforts have lured back its core customers, but at a lower visit frequency. We believe that a much broader effort should be made to reintroduce Chipotle to both former and potentially new customers …”
In other words, the comeback is stalling out and Wall Street is watching. Analyst at Nomura cut their forecast of same-store sales and earnings per share forecasts earlier this week. Not long after, analysts at Raymond James cut their rating on Chipotle stock to “underperform.” That’s another word for sell. See here:
“[W]e are increasingly of the view that lost sales (still down 15-20% nearly a full 12 months after the initial E.coli incident) could prove to be more permanent in nature, which creates additional downside risk in the stock. We suspect the remaining sales decline reflects a more permanent change in frequency/loyalty among some consumers (from unusually high levels prior to the incident) rather than elevated food safety concerns.”
This is why CMG stock can’t break out of its slump. The pressure on the bottom and top lines is too great. For the most recent quarter, analysts on average expect Chipotle earnings to tumble to $1.66 a share from $4.59 a year ago, according to a Thomson Reuters poll. Revenue is projected to slump more than 10% to $1.09 billion.
With more fundamental weakness ahead — and forward price-to-earnings multiple of 40 — investors are going to have to wait for a much better entry point on this name.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.