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Chipotle Mexican Grill Company Earnings: Burned Again

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The fire sale at Chipotle (NYSE: CMG  ) rages on.

Shares are down as much as 15% today after the company again came up short on both top and bottom lines -- a cardinal sin for growth stocks. Here are the key numbers from the report:

  • Sales grew 18.4% to $700.5 million, short of expectations of $703.6 million.
  • EPS increased 19.5% to $2.27, missing estimates of $2.30.
  • Same-stores sales increased just 4.8%.

That level of revenue and same-store sales growth was the lowest the company's seen since Q1 2010, while EPS growth was its second-lowest since 2008. Perhaps even more damaging for investors was the company's projection that comparable-store sales would be "flat to low single digits" in 2013. Part of the reason for the low projection was last year's exceptionally warm winter, which brought out higher-than-normal traffic, meaning that the burrito chain could see negative comps in Q1 2013 if temperatures return to historical averages. Of course, it's worth remembering that at this time last year management had projected low single-digit comps, a mark the company has easily eclipsed thus far.

Unlike same-store sales in recent quarters, Chipotle's price increase last year had mostly been absorbed, so comps were naturally expected to be lower. Management said it had no plans to raise prices in 2013, though it was keeping the option on the table depending on food cost inflation, competitor moves, and other developing patterns.

Without an increase in customer volume or a price increase that would help push same-store sales, new store openings are the only way for the company to grow sales. In this department, management was able to deliver some good news, as it expects to hit the high end of its 155-165 new store range this year and plans to add between 165 and 180 in 2013 because of a strong "real estate pipeline." With 1,350 stores currently open, next year's addition will grow the number of locations 12% to 13%, and should boost sales by about 10% as new stores' sales tend to be lower than those at more mature ones.

Also on the call, founder Steve Ells (without mentioning any names) called out hedge-fund manager David Einhorn's suggestion that the new Cantina Bowl line from Yum! Brands' (NYSE: YUM  ) Taco Bell would eat into Chipotle's sales, by pointing out that traffic trends from the second to the third quarter had not changed despite Taco Bell's massive advertising campaign during the quarter. Ells also poked fun at "competitors" who sell grilled chicken, but don't have grills, knives, or cutting boards. "The customer isn't easily fooled," he said.

Management reminded listeners on the call that the vast majority of Chipotle's growth will come from domestic Chipotle restaurants, though expansion through international locations and the new ShopHouse concept appears to be picking up. The company added two new stores in London during the quarter. It plans to open its first in Vancouver by the end of the year, and to enter Germany next year -- its third European market. 

Ells touted the popularity of ShopHouse at a recent Chipolte Cultivate promotional event, and said the company would open a ShopHouse in Los Angeles in the first half of next year, as well as a second location in Washington, D.C., in the beginning of 2013.

Foolish takeaway
While the long-term growth story still remains intact as the company adds new locations at a steady pace, Chipotle's same-store sale guidance is enough to make investors shudder, especially after two disastrous earnings reports.

Management guidance has been conservative in the past, so shareholders may have good reason to believe in near-term organic growth, but flat comps would damage the stock even more. Even with its P/E now compressing to less than 30, there is still plenty of room for it to head lower if growth continues to slow.

Management cited continuing weakness in the economy as an issue, and McDonald's (NYSE: MCD  ) , which reported today, may have helped to confirm that trend, as its earnings and sales both slipped from last year. Restaurants are particularly sensitive to consumer discretionary spending, and a recovery in the economy and increased consumer spending would certainly be a boon to both chains.

There's no question Chipotle is a great company -- as its speedy growth and market-leading margins indicate -- and its innovations have made it a pioneer in the fast-casual segment spawning several imitators. Still, as investors have seen in the past two quarters, that does not necessarily make for a great investment.

Over the next five to ten years, Chipotle's strong brand and ability to expand overseas and domestically should help the stock recover to the heights we've seen in the past year, but with same-store sales expected to slump in the fourth quarter and next year, that recovery will clearly be slower than investors had hoped. The next few quarters could continue to be painful ones.

While Chipotle is just beginning to get its feet wet in markets abroad, there are some American companies that are already raking in the dough outside the U.S. With a booming middle class in countries like China and India, these stocks could be ready to soar. Get the scoop on these hot companies in our special free report, "3 American Companies Set To Dominate The World." Just click right here to get your free copy now.

Fool contributor Jeremy Bowman owns shares of Chipotle Mexican Grill . The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Motley Fool newsletter services recommend Chipotle Mexican Grill, Chipotle Mexican Grill, McDonald's, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (13) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 19, 2012, at 2:39 PM, prginww wrote:

    Chipotle has never attempted to grow comps. They do not introduce new menu items, they do not run specials, and every Chipotle I have ever been to has been packed, open to close.

    In the small town (50,000) where I live they opened their first location and it was always jammed with a long line out the door; a year later they opened their second location and now they are both always tolerably busy.

    The company's story is about taking a very simple, very attractive-to-consumers business model and growing it into the whole nation and later, the whole world, with impeccable attention paid to margins and back end so cost of sales never takes an upward spiral. This story has not changed one iota in the past year. Only the schizophrenic stock price has changed.

  • Report this Comment On October 19, 2012, at 6:01 PM, prginww wrote:

    Chipotle was going like gangbusters until they opened a store in New Mexico.

  • Report this Comment On October 19, 2012, at 6:14 PM, prginww wrote:
  • Report this Comment On October 19, 2012, at 7:00 PM, prginww wrote:

    Chipotle is good company

  • Report this Comment On October 19, 2012, at 7:28 PM, prginww wrote:

    Second rate healthy burritos. Going down.

  • Report this Comment On October 19, 2012, at 7:49 PM, prginww wrote:

    Wow- they missed their targets by LESS THAN 1%. Boy I guess it's time to lose faith in this business. Must be a bunch of slackers. And OMG -- in a down economy sales grew only by... 18%! Time to dump this one!

  • Report this Comment On October 19, 2012, at 8:52 PM, prginww wrote:

    I sure like eating at Chipotle's, but paying good prices for the food won't get me to pay outrageous prices for the stock. Not really Chipotle's problem.

  • Report this Comment On October 19, 2012, at 10:59 PM, prginww wrote:

    Chipotle now trades for 21 times next years earnings estimates. This does not take out cash either. Not expensive for a 20% grower with a decade or more of runway ahead.

    To celebrate this weeks share fall I went to Chipotle tonight to lend my hand at increasing sales. I ate two burritos and my wife had the salad bowl. Upon arrival at the Bridgewater NJ store the line was out the door and down the sidewalk.

    People do not seem to mind waiting for the most part. I did note two couples during the entire time I was there come in, see the long line and head back out not wanting to wait. I also saw a lot of pre-order takeout coming in and leaving with bags of food.

    The line was out the door down the sidewalk when I got there at little past 7PM. By the time I left the line was still as long. I watched as the crew pumped orders through but people just keep coming. Peter Lynch says hold tightly to the shares. I'll sell when the long never ending lines stop. Until then I'm buying while shares are on sale. Be greedy when others are fearful my friends

  • Report this Comment On October 19, 2012, at 11:02 PM, prginww wrote:

    I had only tried Chipotle a few times back in 2010, and liked it, when the story came out that they were hiring illegal aliens in Minnesota, and had been caught. Now I refuse to eat there, because I cannot believe that management didn't know what was going on. For the same reason, I would not invest in the company, either - hard to tell when the next scandal would hit.

  • Report this Comment On October 21, 2012, at 2:25 PM, prginww wrote:

    Never been to Chipotle. Never seen it advertised ever on TV. Have little clue of what they have besides "Mexican food" and "rice bowls" from friends that eat there. The real problem with Chipotle is that their marketing stinks! I have no idea of what they serve and no idea of how much it costs. CMG, fire your PR people because they are obviously not doing much!

  • Report this Comment On October 21, 2012, at 6:04 PM, prginww wrote:

    For context, I am extremely frugal. Friends at work invited me to lunch one day several years ago. I almost skipped lunch as I could not imagine spending over $6 on a fast food burrito. Well, let's just say that not only was it love at first bite, but I immediately went back to my office and bought 50 shares at $44. I have always said this was both my best and worst investment ... Best because of obvious performance and worst because I did not buy more. Since that day my wife, kids, employees, and friends have become full blown Chipotle addicts. If you have not had a barbecoa (marinated shredded beef) burrito at Chipotle, then I just can't blame you for not understanding. But for this investor, I remain long and even sold Puts on Friday, Oct 19, as shares tanked. When customers stop lining up or Chipotle begins compromising, then I will be concerned ... Not before.

    Concerns about Taco Bell eating into Chipotle market share is a joke. Chipotle is not a trendy fad ... It's simply about the quality and taste of the food.

  • Report this Comment On October 26, 2012, at 12:09 PM, prginww wrote:

    Sales and EPS grew almost 20%... Wow, what a terrible company (lol).

  • Report this Comment On December 02, 2012, at 1:23 PM, prginww wrote:

    It Chipotle conveys more disappointing numbers the resulting share decline could make the stock price more appealing to this value investor as the longer term outlook remains compelling as ever.

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