Investors are starting to realize that Chipotle Mexican Grill (CMG -1.34%) may never achieve the same kind of operating efficiency that it was generating when its margins peaked in 2014. The fast-casual eatery filed a financial update after Monday's market close, and it's leading some Wall Street pros to lower their profit outlooks.
Chipotle's sticking to most of its earlier guidance. It still expects to add 195 to 210 new restaurants this year with full-year comps in the high single digits. It still sees its effective tax rate clocking in at 39%. As for the current quarter where its visibility will naturally be pretty spot on since we're just a few days away from the end of the period, Chipotle's expecting a spike in marketing and promotion costs to push its operating costs as a percentage of sales sequentially higher. Chipotle expects food costs to still eat up about 34.2% of sales, but the end result of overall contracting margins has left some analysts scrambling to tweak their earnings targets.
Image source: Chipotle Mexican Grill.
Guac this way
Analysts at Maxim, Credit Suisse, and Deutsche Bank all put out cautious updates following Chipotle's filing. Stephen Anderson at Maxim is trimming his profit forecast for the second quarter. He feels that Chipotle shouldn't have a problem coming through with a double-digit bounce in comps, but the path down to the bottom line is shaping up to be problematic. He's sticking to his Hold rating and $440 price target.
Jason West at Credit Suisse is sticking to his Neutral rating -- and $425 price target -- as he also lowers his bottom-line projection. He now sees Chipotle earning just $2 a share for the quarter that ends next week, well below the $2.45 a share profit that analysts were targeting last week.
Brett Levy at Deutsche Bank is also scaling back his expectations. Between the uptick in marketing spending and the likely increase in costs elsewhere he now is modeling a profit of $2.04 a share, down from his earlier forecast of $2.24 a share. He has a Sell rating on the stock.
Mark Kalinowski at Instinet is slashing his profit outlook for all of 2017 as well as 2018. He now is forecasting a profit-per-share of $8.30 this year and $12 come 2018, down from his earlier marks of $8.75 and $12.75, respectively.
Not every analyst is souring on the burrito roller. Piper Jaffray Nicole Miller Regan is sticking to her bullish Overweight rating. Her $530 target -- unlike Levy, West, and Anderson -- is actually above where the stock is currently trading. She sees the model adjustment as relatively minor, banking on steady quarterly improvements in the near future.
Chipotle will eventually top 2015's unit-level sales production. It won't happen this year. Growing comps in the high single digits only wins back some of the ground it lost in 2016. We'll have to wait until 2018 or more likely 2019 for store-level sales to hit new highs. The bigger challenge will be margins. We're now nearly two years removed from the food-borne illness outbreaks that sent customers scurrying. Improving store-level traffic is important, but so many trends including rising labor and occupancy costs as well as restaurant customer reluctance to eat out will weigh on a complete earnings recovery. Chipotle may be on the comeback trail, but it's going to be a long and bumpy path.
