Shares of Chipotle Mexican Grill (NYSE:CMG) plunged 7.4% on Wednesday after it reported that comparable-restaurant sales growth fell slightly short of analysts' estimates in Q1. In four of the last five quarters, Chipotle shares have dropped significantly following "good-but-not-good-enough" earnings reports.
Once again, the market's reaction to Chipotle's results is overblown. Chipotle executives did state forthrightly that comparable sales growth could slow to the low single-digits for the next few quarters.
But they also expressed confidence that comp growth would eventually accelerate again and they outlined several initiatives that should help. In the meantime, Chipotle is still rapidly adding new restaurants, and it continues to expand its profit margin. This is all good news for patient investors who are willing to ride out Chipotle stock's volatility.
This has happened before
I first invested in Chipotle last April, after the first of these post-earnings stock drops. At that time, Chipotle stock had fallen from an all-time high of more than $600 in March 2014 to less than $500 by the end of April.
This drop was all the more surprising because Chipotle had just reported that comparable-restaurant sales soared 13.4% in Q1 2014. However, investors panicked because of management's commentary about rising food costs. (These worries were unnecessary, as Chipotle grew EPS by 35% last year.)
Chipotle stock was also hammered after the company's Q3 2014 and Q4 2014 earnings reports. While investors continued to worry about food cost inflation, concerns about slowing growth became even more significant.
The sales forecast
Despite posting a 10.4% increase in comparable-restaurant sales last quarter, Chipotle is maintaining its full-year forecast for low mid-single-digit comp growth. By Q3 -- when Chipotle will face an extremely tough comparison due to its 19.9% comparable-restaurant sales growth last summer -- comp growth could be negligible.
However, executives also told investors that Chipotle's growth tends to come in three-year cycles. So, even if sales growth does slow later this year, it will probably accelerate again in the next year or two. For example, in Q1 2013, Chipotle only grew comparable-restaurant sales by 1%. But sales growth quickly bounced back, staying in double-digit territory for all of 2014.
Getting sales back on the right track
Chipotle isn't resting on its laurels. The management team is doing several things to get sales growing faster again.
First, management acknowledged that "rolling blackouts" of its carnitas entree caused by a shortage of responsibly raised pork were confusing customers, who weren't sure when their local Chipotle would have carnitas available. Chipotle is working hard to find alternate pork suppliers and expects to be back to full supply by Q4. In the meantime, it will use its limited pork supply in the markets where carnitas is most popular.
Second, Chipotle is working to integrate mobile payments into its app. It wants to be able to accept Apple Pay in stores and for orders from its mobile app. Third, Chipotle recently partnered with Postmates to offer delivery service in numerous markets. Fourth, Chipotle wants to eventually offer online ordering and payment -- and maybe even delivery -- for catering orders, which could accelerate the growth of that business.
These last three initiatives will smooth the ordering and payment process. They could also contribute to higher throughput, because mobile, online, and catering orders can be prepared in a separate area rather than on the main service line used by customers ordering in the restaurant.
Margins are recovering
Based on Chipotle's various initiatives to drive growth -- in addition to the rising popularity of fast-casual dining more generally -- I am not too concerned about Chipotle's sales growth remaining permanently depressed.
Meanwhile, the bogeyman of margin contraction due to higher food costs is quickly receding. Last quarter, Chipotle's food, beverage, and packaging costs totaled 33.9% of revenue: down from 34.5% in Q1 2014 and 35% in Q4 2014.
Chipotle also confirmed that it will increase the prices of its beef entrees by 4%-6% by the end of Q3 in order to offset the sky-high price of beef. Just as the menu price last year drove strong margin expansion in the second half of the year, the coming beef price increase will contribute to further margin growth.
In short, there are lots of reasons to believe Chipotle is on the right track. Management sees a clear path to opening roughly 200 restaurants this year, which will keep sales growth well into double-digit territory even if comp growth slows. The company is also working on several fronts to keep comparable restaurant sales growing as fast as possible. Lastly, high food costs haven't damaged Chipotle's profit margin.
Investors with a long-term horizon should consider investing in this fast-casual powerhouse. If Chipotle stock falls any further this summer, I may pick up a few more shares, too.
Adam Levine-Weinberg owns shares of Chipotle Mexican Grill and is long January 2016 $80 calls on Apple, short January 2016 $120 calls on Apple, and short January 2016 $140 calls on Apple. The Motley Fool recommends Apple and Chipotle Mexican Grill. The Motley Fool owns shares of Apple and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days.