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Why Chipotle Mexican Grill, Inc. Stock Slipped 13% in June

By Jeremy Bowman - Jul 8, 2017 at 1:38PM

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Shares of the burrito roller took a dive after the company issued a disappointing guidance update.

What happened 

Shares of Chipotle Mexican Grill, Inc. (CMG 1.61%) were unraveling last month after the burrito roller issued a warning on its second-quarter performance. According to data from S&P Global Market Intelligence, the stock lost 13% last month.

A Chipotle restaurant in Los Angeles

Image source: Chipotle

As you can see from the chart below, the bulk of that decline came on June 20 when that warning came out.

CMG Chart

CMG data by YCharts

So what 

The burrito chain said in an 8-K filing that it was meeting with a group of investors and reaffirming guidance for the quarter and the year. It said food costs for the current quarter were expected to be 34.2%, and that marketing costs were expected to be 20-30 basis points higher than in the first quarter, or the equivalent of 3.6-3.7% of sales.  As a result, management said that operating costs as a percentage of revenue could be slightly higher than in the first quarter.

The company also said it continued to project high-single-digit comparable sales growth for the year and 195-210 restaurant openings.

Those weren't bad numbers, but the market was clearly disappointed as shares fell 7% that day. Investors seemed to interpret the update as confirmation that Chipotle's turnaround was going more slowly than expected and that increased marketing costs and higher prices in some markets were not leading to an improvement in same-store sales.

Now what

Chipotle has put the challenges of the E. coli crisis behind it, but the burrito chain is still not back at full strength. Customers aren't visiting as frequently, CEO Steve Ells said operations in many stores were unsatisfactory, and the company experienced a credit card security breach earlier this spring.

We'll learn more when Chipotle reports earnings at the end of the month, but the window for a strong turnaround is closing with each passing month.

Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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