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.
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.
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