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David Einhorn wins again.
Shares of Chipotle Mexican Grill (NYSE: CMG ) opened 10% lower this morning, after the fallen growth-stock darling posted uninspiring preliminary fourth-quarter results.
The burrito roller's revenue climbed 17% to $699.2 million, fueled by a reasonable 3.8% increase in comparable-store sales and heady expansion. Chipotle opened 60 new eateries during the quarter itself.
Chipotle's top-line performance is fine. Analysts were only targeting revenue of $690.9 million. The real problem here is the slippery walk down the income statement. Margins got crushed, stemming mostly from escalating food costs that took the company by surprise. Unfortunately, this isn't the first time that Chipotle wasn't able to react to rising commodity costs in time to pass the increases on to its customers through menu price adjustments.
Chipotle is now expecting to post a profit between $1.92 and $1.97 a share when it reports on Feb. 5. This will be well short of the $2.09 a share that analysts were forecasting, and a head-shaking 6% to 9% growth. When you're a premium-priced growth stock -- and even at today's sharply lower open, Chipotle's fetching a hefty 26 times this year's projected profitability -- that's just not good enough.
Billionaire hedge fund manager Einhorn appears to have hit pay dirt, again.
He bashed Chipotle three months ago during the Value Investing Congress. He argued that Yum! Brands' (NYSE: YUM ) Taco Bell was eating into Chipotle's popularity with its new Cantina Bell line of bowls and burritos. The stiff valuation for a maturing concept also didn't sit well with him.
Taco Bell went on to post healthier comps growth than Chipotle shortly after Einhorn's attack, so there was some truth to his knocks. The stock closed at $316.13 a share the day before his presentation. The stock's open today represents a 15% decline, even though equities have generally rallied in that time.
Panning Chipotle may not play out as well for Einhorn as his prior year's diss of Green Mountain Coffee Roasters. The company behind the Keurig brewing system has been rallying lately, but its shares are still trading 57% below where they were when Einhorn made Green Mountain his short candidate for the 2011 Value Investing Congress.
However, it's easy to see Chipotle continue to lose ground if it can't get its margins in line. Even before today's grim profit snapshot, the chain was showing signs of mortality. The same growth darling that used to routinely blast through Wall Street's profit targets has come up short in two of its past four quarters. Three months ago, analysts were banking on a profit of $10.89 a share out of Chipotle in 2013. Now those same pros are perched on $10.42 a share, and that target is likely to inch lower now until Chipotle proves that it's past this margin crunch.
Investors need to be careful here. Chipotle isn't cheap enough to be considered a value trap.
The silver-foil lining here is that the chain's popularity isn't being questioned. The top-line results for the holiday quarter were tasty. Those long and occasionally winding queues at your local Chipotle aren't getting any shorter. It's easier to fix a bottom-line problem than a top-line funk.
However, until Chipotle returns to posting double-digit earnings growth, the stock is going to be under pressure.