Chipotle Mexican Grill (NYSE: CMG ) (NYSE: CMG-B ) sparked major indigestion today with ominous tidings. It said, "the impact of the weakened economy has been greater than anticipated resulting in further sales deceleration …" It's quite a run-on sentence, actually, but it's hard to blame anybody for stomach-churning anxiety.
Third-quarter comparable restaurant sales will be in the low single digits, at least according to the data to date. Third-quarter earnings will come in below last year's third quarter, because of the pretty obvious double whammy of the weak economy and rising food costs.
When Chipotle reports quarterly results in October, it will reveal pricing plans that it's working on for the fourth quarter, which are intended to offset increasing food prices. It will also reveal exactly how much lower the earnings will be compared to last year. The element of uncertainty here isn't exactly appetizing, even if it was garnished with some spicy salsa.
Other restaurant stocks that might be in danger of similar "whoops-it's-worse-than-we-thought" developments are in focus, too. Panera (Nasdaq: PNRA ) and Buffalo Wild Wings (Nasdaq: BWLD ) are also getting beaten down. (Both were downgraded by a Morgan Keegan analyst, mostly thanks to already high valuations, it appears.) Personally, I'd be concerned that maybe both are cruising for macroeconomic bruisings even worse than Chipotle -- going out for beers and wings, or fresh baked bread, might not be high on the list for a lot of people who just don't have much cash right now.
Ever since February, I have viewed significant decreases in Chipotle's stock price (here and here) as opportunities, but obviously, I have been way too early. On the other hand, it looks like the stock was indeed overstuffed with optimism last fall.
I still believe Chipotle is a great company and stock, with awesome innovative strategies that remind me more of Starbucks (Nasdaq: SBUX ) and Whole Foods Market (Nasdaq: WFMI ) than former parent McDonald's (NYSE: MCD ) . (Although one certainly can't complain about Mickey D's performance these days.) I have long perceived weakness as an opportunity for investors with long-term horizons. Chipotle has a solid balance sheet, too, a nice bonus when credit jitters are prevalent.
That's still the case, but today's burrito is stuffed with the mystery meat of uncertainty, unfortunately, and rash moves seem to me a mistake. The company has reached much more reasonable valuations since the beginning of the year, but given the bland third quarter that management is expecting, I'd wait to see investors' reactions before picking up shares.
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