Chipotle Mexican Grill, Inc. (CMG) Stock Looks Scary Ahead of Earnings

Back in 2015, Chipotle Mexican Grill, Inc. (NYSE:CMG) was the stock to own if you wanted exposure to the quick service restaurant industry. CMG stock had rallied from $50 at the beginning of 2009 to a high above $750 in August 2015 behind huge demand for the company’s “make-it-yourself” Mexican-style burritos and bowls.

CMG Stock: Chipotle Mexican Grill, Inc. (CMG) Stock Looks Scary Ahead of Earnings
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But that was the mountain-top for Chipotle. An E. coli outbreak hit the restaurant hard in late 2015. That was a big hit, but it wasn’t just a one-time thing. After that big outbreak, there were other mini-norovirus outbreaks. There were also pictures and videos that went viral of rats crawling around the floor at a Dallas location.

All in all, the past couple of years have illustrated to consumers that Chipotle Mexican Grill isn’t exactly the family-friendly and safe place it used to be. Consequently, consumers left in droves.

They haven’t come back yet. And when CMG reports third-quarter numbers after the bell on Tuesday, even bulls will start to get the feeling that those consumers may never come back.

Chipotle Will Have Limited Success Going Forward

The simple truth is that consumers have moved on from Chipotle.

Before the E. coli outbreak, it seemed like everybody loved CMG. It was the biggest thing in fast food. It was cheap, tasty, convenient and in some ways notably healthier than most other fast food chains.

But the quick service restaurant industry has dramatically evolved over the past two years to become healthier than ever, while Chipotle has been stuck in neutral dealing with its health-related issues.

From this standpoint, there are really three big secular headwinds facing CMG.

Firstly, new pop-up poke and pizza shops have completely stolen Chipotle’s thunder. Poke is the big thing now. It’s cheap, tasty, convenient and fairly healthy. Plus, it’s a play on the “make-it-yourself” concept. Same with rising pizza chains like Blaze. Then there is the whole sushi burrito craze which seems to be trending in at the same time as traditional burritos trend out.

Bad news for CMG.

Secondly, there are a whole bunch of rapidly growing restaurant chains that are stealing quick-service market share. Trendy, health-conscious burger chains like Habit Restaurants Inc (NASDAQ:HABT) and Shake Shack Inc (NYSE:SHAK) are aggressively expanding into new geographies. Then there are places like Lemonade, the mega-popular, mega-healthy California chain that could pull the expansion trigger at any moment.

Considering each restaurant’s respective popularity, the writing is on the wall for these chains to rapidly eat market share over the next several years.

Again, bad news for CMG.

Thirdly, traditional quick-service has undergone a dramatic makeover. Long-standing quick service giants like McDonald’s Corporation (NYSE:MCD) are leveraging new menu additions to successfully reinvent themselves as a perfect crossover of price and health. Two years ago, McDonald’s was struggling and losing market share. Now, McDonald’s is thriving and gaining market share.

Yet again, bad news for CMG.

All in all, the quick service restaurant industry looks a lot different now than it did before Chipotle’s E. coli outbreak. That means that even if Chipotle successfully “fixes it image,” they won’t return to peak-2015 popularity. Consumers have simply moved on from traditional burritos and are now choosing poke, sushi burritos, “make-it-yourself” pizzas and healthy burgers.

Bottom Line on CMG Stock

And CMG management knows that consumers have moved on. That is why after years of electing not to, they finally expanded the menu to include queso. But the broad read from consumers is that the queso is quite bad. Go try it yourself if you don’t believe me.

In other words, the queso roll-out was a defensive move that didn’t play out as planned. Quarterly numbers on Tuesday will illustrate this.

Considering CMG stock trades at a rather rich 44-times fiscal 2017 earnings estimates, any hiccup in the quarterly numbers could result in a hefty decline in the stock price.

Consequently, heading into Tuesday’s report, the risk-reward profile on CMG stock skews heavily towards the downside.

As of this writing, Luke Lango was long MCD.

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