Chipotle (CMG) Stock Falls On Q3 Earnings Miss, Downbeat View

Shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) declined nearly 10% in afterhours trading on Oct 24, after the company reported lower-than-expected third-quarter 2017 results. Further, an expected slowdown in new restaurant openings led to the slump in the stock price.

Earnings and Revenue Discussion

Chipotle reported earnings of 69 cents per share, up significantly from the prior-year quarter earnings of 27 cents per share. Notably, the bottom line included effects from a data breach in April 2017 on its restaurant's payment system.

Precisely, management cited a 64 cent per share impact associated to the data security incident and a 13 cent impact from Hurricanes Harvey and Irma on the quarter’s earnings.

Excluding the effects of the data breach, adjusted earnings came in at $1.33 per share, far below the Zacks Consensus Estimate $1.56 per share.

Total revenue rose 8.8% from the year-ago quarter to $1.128 billion primarily driven by new restaurant openings and somewhat by increase in comps. Meanwhile, revenues were almost in line with the consensus mark of $1.134 billion.

Behind the Headline Numbers

Comps grew a mere 1% in the quarter despite the highly-anticipated nationwide roll-out of queso cheese dip. This uptick was significantly lower than the prior-quarter growth of 8.1%.

Meanwhile, food costs, as a percentage of revenues, decreased 10 bps to 35% given reduction in paper cost and usage as well as benefit of menu price increases in select restaurants during second-quarter of 2017. These were somewhat offset by higher avocado and beef prices as well as steak making up a higher portion of its product mix compared to the year-ago quarter.

General and administrative expenses comprised 8.8% of the total revenue, reflecting an increase of 120 bps year over year.

Restaurant level operating margin was 16.1%, up 200 bps from 14.1% recorded in the year-ago quarter. The upside was primarily driven by reduced marketing and promotion expense and labor efficiencies.

Guidance for 2017

Chipotle now projects comps to increase nearly 6.5% in 2017 compared with prior expectation of an increase in high-single digits. Additionally, new restaurant openings are anticipated to be slightly below the low end of the previously guided range of 195–210.

2018 View

Management intends to open 130 to 150 new restaurants in 2018. By slowing down the new openings, the company aims to better focus on already opened restaurants.

Chipotle Mexican Grill, Inc. Price, Consensus and EPS Surprise

Chipotle Mexican Grill, Inc. Price, Consensus and EPS Surprise | Chipotle Mexican Grill, Inc. Quote

Our Take

We note that, 2017 has been a challenging year for Chipotle. Though initially sales somewhat recovered from the massive food safety scandal, which surfaced toward 2015-end, a fresh round of food-safety scare this summer once again raised alarming questions. Also, a menu price increase of roughly 5% in about 900 of its restaurants in mid or late November might not go down well with customers.

Meanwhile, following a board shake up and various management changes, Chipotle is now working hard to strengthen its brand, recover sales and bring back customers. The company plans to do this by shifting its strategy from giveaways, discounts and rewards to new menu items, simplification and improvement of restaurant operations, technology-driven convenience as well as enhancement of guest experience by retraining workers.

Whether these endeavors will bear fruit? Only time will tell!

Zacks Rank & Upcoming Releases

Chipotle has a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other firms in the restaurant space, BJ's Restaurants, Inc. (NASDAQ:BJRI) , Dunkin' Brands Group, Inc. (NASDAQ:DNKN) and Restaurant Brands International Inc. (NYSE:QSR) are expected to release their third-quarter numbers on Oct 26. The Zacks Consensus Estimate for the quarter’s earnings is pegged at 24 cents, 63 cents and 49 cents for BJ's Restaurants, Dunkin' Brands and Restaurant Brands, respectively.

Zacks' Hidden Trades

While we share many recommendations and ideas with the public, certain moves are hidden from everyone but selected members of our portfolio services. Would you like to peek behind the curtain today and view them?

Starting now, for the next month, I invite you to follow all Zacks' private buys and sells in real time from value to momentum...from stocks under $10 to ETF to option movers...from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors.

Click here for Zacks' secret trade>>