Chipotle Mexican Grill (NYSE: CMG) might have to lay off the guacamole a little bit. Although its second-quarter profit rose, the figure missed analysts' expectations. Rising food costs and legal fees took a bite out of Chipotle's burrito. Should investors pass on this spicy stock?
Second-quarter net income increased 9%, to $50.7 million, or $1.59 per share. More hearteningly, Chipotle's second-quarter sales surged 22.4%, to $571.6 million, and same-store sales skyrocketed by 10%.
Unfortunately, the high price of foodstuffs forced Chipotle to skimp on the prices. Its restaurant-level operating margin plunged 110 basis points to 25.8%.
As a result, Chipotle missed analysts' estimates by $0.09 per share. Legal expenses related to a federal probe into the company's hiring of illegal immigrants also dragged down Chipotle's bottom line.
As far as other drags go, rising food prices and a difficult consumer climate will hurt plenty of restaurants besides Chipotle. For example, higher beef costs this year could seriously squeeze weakened stocks like Ruth's Hospitality (Nasdaq: RUTH). I wouldn't want to touch middle-of-the-road, uninspiring restaurant companies like Ruby Tuesday (NYSE: RT) in this environment, either. What about Wendy's (NYSE: WEN), which has been suffering at the hands of stronger competition like McDonald's (NYSE: MCD) and recently had to shed the Arby's part of its business? I'll pass.
In short, investors should cut Chipotle a break for its profit miss, given its robust sales and comps figures. Customer traffic isn't Chipotle's problem, even though fewer people have the disposable cash to eat out. That says a lot.
Still, potential investors craving a bite of Chipotle shares probably wish the stock had sold off far more significantly than it has today. After all, it would be nice to get this high-quality stock at a cheaper price than a whopping 54 times earnings.
