On an up day for the market yesterday, Chipotle Mexican Grill (NYSE: CMG ) , one of the best-performing stocks over the last few years, dropped a surprising 6% and is down another 4% today in heavy trading. The culprit appears to be fairly simple. Analyst Steve West of ITG Investment Research said he sees slower same-store sales growth in Chipotle's second quarter, as well as revenue coming it at less than consensus estimates. West predicted the burrito-roller will bank $700 million in sales when average estimates are at $705.8 million.
So where's the news here?
One analyst projects revenue coming in at 0.8% less than estimates for one quarter, just two-tenths of a percent for the year, and the stock sinks 10%. Seven hundred million dollars isn't even a particularly low estimate, either; at least one analyst believes Chipotle will only take in $664 million. West also said he thought comps would only go up by 7% to 8% this quarter as opposed to 12.7% in Q1 and analyst expectations of around 10% for the quarter, but that's also not news. The company itself predicted that same-store sales would only grow by mid-single digits for 2012 as previous price increases are absorbed. Based on that statement, 8% looks pretty good.
It shouldn't come as a surprise that same-store sales would slow down. With cyclical factors removed, comps tend to decline as retail businesses mature, especially at restaurant chains like Chipotle, whose locations often operate at capacity during the lunch and dinner rushes. While price increases or improvements in throughput could boost comps, the burrito chain has avoided adding menu items the way chains like McDonald's (NYSE: MCD ) do to boost sales and average ticket prices.
With Chipotle, the growth story is, and has always been, about new stores. Comps are always a good sign of a healthy brand, but the company is expanding its store count by more than 10% a year and is just getting its feet wet with new locations in Europe and a new concept called ShopHouse Southeast Asian Kitchen, which opened its first location last year. Considering that franchises like McDonald's and Subway have more than 30,000 locations worldwide, the expansion potential for a chain like Chipotle with only about 1,250 restaurants is huge.
What really seems to have spooked investors about West's comments is simply that something could go wrong with this highflier. After the collapse of once-promising growth stories like Netflix (Nasdaq: NFLX ) and Green Mountain Coffee Roasters (Nasdaq: GMCR ) , investors have been conditioned to flee at the first sign of something fishy. These stocks were market darlings and priced to perfection before their drops, much the same way Chipotle is priced now. Chipotle stock has gotten pumped up ahead of its actual earnings growth in recent years as excitement around the brand has built, but it operates in a more consistent industry than the two above companies whose wings got clipped. Unlike the changing technology that forced Netflix away from the mail-order model or the patent cliff that cast a cloud over the K-Cup, Chipotle doesn't have the same risk of a technological threat, only a more appetizing brand. So it's hard to see a reason why so much air should slip out of the stock so suddenly without any news about the company itself. The reaction to West's comment seems way overblown.
Chipotle isn't the only restaurant getting hammered over the last two days. Panera Bread (Nasdaq: PNRA ) is down about 5%, while Starbucks has dropped 4%. Industry groups have also noted that the Supreme Court's health care decision today will force labor costs up for restaurants (though that decision did not come until this morning).
After the correction over the last two days, the burrito chain trades at prices not seen since early February.
We'll find out if West's predictions are accurate when the company reports earnings on July 19. Analysts are estimating EPS of $2.30, a 40% jump over last year's figure, and revenue is expected to improve by 23%. It seems like even West knows a good thing when he sees it, saying: "In our view, Chipotle is still experiencing industry-leading growth and is still expected to report strong sales at quarter's end." If this growth story's over, nobody seems to believe it.
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