It’s been a rough stretch for Chipotle Mexican Grill, Inc. (NYSE:CMG). Chipotle stock trades more than 60% below an all-time high of $742 reached back in 2015. A series of food poisoning incidents have hurt the brand. The resulting deceleration in same-store sales growth has led to both disappointing earnings and a shrinking multiple assigned to CMG stock.
For much of the past two-plus years, CMG has looked like a potential turnaround play. But Chipotle simply hasn’t shown enough to support much optimism. Short sellers continue to target Chipotle stock: almost 12% of the float is sold short. And in November, CMG hit its lowest level in almost five years.
Those lows might be in play again coming out of the company’s Q4 earnings report on Tuesday afternoon. CMG stock fell 7.7% in after-hours trading despite fourth-quarter results coming in ahead of analyst estimates. The problem, however, is a disappointing outlook for 2018.
With Chipotle stock still pricing in quite a bit of growth, the company’s guidance simply isn’t good enough. As a result, the post-earnings declines make some sense – and could accelerate over the next few weeks.
Headline numbers for Q4 suggest some optimism — and as a result Chipotle stock initially gained in aftermarket trading. Revenue rose a bit over 7%, in line with Street expectations. EPS came in at $1.55; an adjusted figure of $1.34 excluding benefits from corporate tax reform beat consensus by $0.02.
And there is some good news in the quarter’s results. Comparable sales rose, albeit just 0.9%. Food costs declined as a percentage of revenue; restaurant-level operating margin increased to 14.9%. EPS even excluding tax help rose 144%.
Full-year results don’t look too bad, either. 6.4% comp growth is a solid number – one of the best in the sector, actually. Restaurant-level operating margins rose 410 bps. Net income soared from $0.77 last year to $6.17 this year on a GAAP basis.
But behind those seemingly solid numbers are a lot of problems. Year-over-year growth looks solid – but Chipotle is comparing against a disastrous 2016, when total revenue declined year-over-year for the first time ever. There were some one-time benefits to margins as well, including price increases in both Q2 and Q4. That pricing, however, drove all of Q4’s comp growth: traffic actually declined. And guidance on the company’s Q4 conference call suggests a muted outlook on that front for 2018.
Indeed, it was the conference call itself that led Chipotle stock to reverse in postmarket trading. Management talked up potential operational improvements on the call, with CEO Steve Ellis citing “low-hanging fruit” including just changing light bulbs and replacing stainless steel pans. Chipotle also plans investments in areas ranging from IT to new prototype restaurants and optimizing energy use.
But aside from a loyalty program due to debut in the second half of this year, there wasn’t anything remarkable or unique in terms of the company’s plans going forward. And guidance suggests a relatively modest amount of growth in 2018. CFO Jack Hartung said January same-store sales were up 3.4% – but with comparisons getting tougher over the next five months, lowered expectations for overall first-half growth. Full-year comps are guided to be in the low-single-digits – and the company expects traffic to again decline in the first half of the year.
CMG stock is a turnaround story, as James Brumley detailed last month. But it’s hard to see much concrete evidence for a turnaround in Q4 results or commentary. There isn’t a plan to attack some of the branding concerns created by the company’s food safety missteps. Competition in “fast casual” remains intense. The number of visitors to Chipotle restaurants is declining – and is expected to decline for the next two quarters. The hoped-for second-half improvement is coming in part from the loyalty program – but also in part due to the simple fact that year-over-year comparisons are getting easier.
There’s simply nothing compelling in Q4. And as poorly as Chipotle stock has performed, valuation suggests investors still need something more to get excited.
Chipotle Stock Isn’t Cheap
Even at the after-hours price of $281, CMG still trades at almost 29x analyst consensus for 2018. Chipotle didn’t give specific EPS guidance on its call, but with the company reinvesting roughly one-third of its tax reform savings into employee benefits and other areas, it’s possible those estimates will be pulled down over the next few days.
That leaves CMG trading possibly as high as 30x 2018 EPS – and that’s a multiple that looks too high. Few restaurants get that type of valuation. Chili’s operator Brinker International, Inc. (NYSE:EAT), which has similar restaurant-level margins to Chipotle (albeit with worse top-line growth), trades at barely 10x. Applebee’s and IHOP owner DineEquity Inc (NYSE:DIN) is in the same ballpark. Even growing concepts like Domino’s Pizza, Inc. (NYSE:DPZ) and Yum! Brands, Inc. (NYSE:YUM) are in the high 20s despite substantial amounts of higher-margin franchise revenue.
Chipotle’s Q4 simply doesn’t look like enough to keep that multiple intact. And that could – and maybe should – move the stock toward $250, below the $263 level reached in November. Longer-term, the story isn’t quite broken. Chipotle still is opening stores (it’s guiding for 5-6% unit growth this year), remains profitable, and can overcome its branding issues in time.
But at this price, ahead of what the company itself expects will be a weak first half, there’s little reason to jump in. Chipotle stock has a lot left to prove – but Q4 did little to help its case.
As of this writing, Vince Martin has no positions in any securities mentioned.