Chipotle Mexican Grill (CMG 2.41%) stock spilled its beans for the second quarter in a row this week. Shares of the high-flying burrito chain slid 7.4% on Wednesday following a slowdown in sales in the first quarter and underwhelming same-store sales guidance for the year.
That disappointing report followed a 7% dip in the stock in February after it reported fourth-quarter earnings, and shares are now down 12.5% from its peak before that earnings report.
Longtime investors and followers of the stock may be worrying that another collapse in the stock is on its way, similar to what happened in 2012. At that time two consecutive disappointing earnings reports sent the stock down nearly 40% as investors became concerned that growth was slowing due to rising competition.
Like most growth stocks, Chipotle's path higher has never been smooth, and is likely to be similarly rocky in the future as its P/E valuation has ranged between 30 and 60 over the last five years. Still, there are several key differences between now and 2015 that should reassure investors that a 40% drop like the one we saw a few years earlier isn't about to happen.
Temporary problems
In the second half of 2012, comparable sales began to slow as Chipotle rolled off of a price increase in 2011, much like they are doing now, and investors ran for the door as the company projected flat to low-single-digit comps for 2013. At that time, famed hedge-fund manager David Einhorn got a lot of attention for shorting Chipotle stock and many saw Taco Bell's rollout of its competing Cantina Bowl lineup as a threat that would cool off Chipotle's growth.
Today, the preeminence is of Chipotle's model and product seems more widely accepted by the business community, particularly as McDonald's sales are tanking. Unlike 2012, there is believable threat to Chipotle's growth, and at least two significant problems are either temporary or industrywide.
First, the company's sales are taking a mild hit from its decision to pull its carnitas pork offering from many of its stores after it found that key supplier was not complying with its animal welfare standards. CFO Jack Hartung estimated comparable sales 100 to 200 basis points lower than they should have been because of the pork shortage. The company had also been instituting rolling blackouts on carnitas at stores, or alternating the stores that didn't have carnitas. This left many customers confused, and many stopped visiting their local Chipotle under the assumption that they would not have carnitas until further notice. Chipotle has decided to end that policy, and only serve carnitas and the stores where it's most popular. This should mitigate the problem until full supply is restored, which management expects to happen by the fourth quarter.
Similarly, beef prices have spiked, pinching profits on Chipotle' sales of steak and barbacoa burritos. To counteract that, the company is planning to raise prices on those items in the third quarter by 4-6%, which should lift sales by about 150 basis points.
The stock isn't so pricey now
After several jumps in earnings per share and a decline in the stock price, the stock now trades at a forward P/E of just 37 according to S&P Capital IQ Data. By comparison, the much larger Starbucks trades at a forward P/E of 32. However don't be fooled, Chipotle is growing ALOT faster than the coffe purveyor. In its most recent quarter, earnings per share grew 18% at Starbucks but were a white-hot 47% at Chipotle. Meanwhile, Starbucks has over 22,000 stores worldwide compared to less 2,000 Chipotle locations. Arguably, the burrito roller figures to have a longer expansion path ahead of it.
Continued weak earnings report would surely send Chipotle stock lower, but the stock is now cheaper than it's been in a year-and-a-half, meaning investors may see it as a buying opportunity if the stock falls any lower.
Management did their best to manage expectations on the earnings call, projecting the comparable sales could dip to the low single digits later in the year. However, considering that the company is lapping a year when comps jumped 17%, that shouldn't be surprising. CFO Hartung also noted that comps for the company seem to have moved in a three-year cycle and with this year being the last year of that cycle, they could be entering a lull.
That means the stock is likely on its way to a less-than-stellar year, but the long-term story is still intact. With a delivery service just rolling out and 200 more restaurant openings this year, the company is clearly still focused on growth initiatives. I'd expect good things for the stock in 2016 and beyond.
