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Chipotle Stock Has a Lot to Prove on Tuesday

By Rick Munarriz – Oct 22, 2016 at 7:00AM

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The struggling burrito roller steps up for an important quarterly report. Wall Street sees pain. Investors are looking for relief.

Image source: Chipotle.

There are plenty of reasons for Chipotle Mexican Grill (CMG 1.45%) investors to be nervous as we head into the new trading week. The slumping restaurant chain reports fresh financial results after Tuesday's market close. 

It won't be pretty. Analysts see a 10% year-over-year dip in revenue, as slowing unit growth won't be enough to offset what will probably be its fourth consecutive quarter of double-digit negative comps. It was also a highly promotional quarter for Chipotle. The burrito roller was giving away food throughout the entire quarter with its Chiptopia temporary customer rewards program.

The giveaways peaked last month with free kid meals on Sundays, and fountain drinks for high school and college students. Chipotle's aggressive promotions will scorch its net profit margin. Wall Street pros see a sharp drop in profitability, with earnings per share plummeting 64%, to $1.66. That's bad, but it could be worse: Chipotle posted its first deficit as a public company during this year's first quarter. 

The silver lining here is that everyone is bracing for a rough quarter. The payoff pitch will be what Chipotle offers up in its outlook for the holiday quarter, but that's yet another thing for investors to fret about as Tuesday's market close approaches. 

Life after the fall

Shares of Chipotle have fallen 37% over the past year. The former darling of the fast casual world came undone in early November of last year when investors heard about the first food-borne illness outbreak. It wouldn't be the last, and even though there hasn't been an outbreak at all in 2016 and the Centers for Disease Control cleared the chain back in February, the assembly lines at your local outlet aren't as long as they used to be. 

Things should start to get better. The chain's store-level performance should improve come November when it's pitted against the first of the double-digit negative monthly comps. If comps don't turn positive by the first quarter of next year, it's going to scare a lot of bulls, since that would suggest that folks are more scared of eating at Chipotle now than they were in the months when the CDC was making public warnings about food safety at the eatery.

Getting back to its peak levels of mid-2015 will probably take a couple of years, and that may very well be the case for Chipotle's stock. Justifying its hefty market multiples at its peak may be tricky now that Chipotle has proven mortal, but keep in mind that there will be more restaurants open at the time. Its younger ShopHouse, Pizzeria Locale, and possibly even Tasty Made concepts should also be more relevant at that point.

Chipotle needs to give investors hope that there's a light at the end of this tin foil-wrapped tunnel. That opportunity is now three days away. Investors will be nervous on Tuesday. The stock will be on the move -- one way or another -- on Wednesday.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. 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.

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