Source: Chipotle Mexican Grill.
What: Shares of Chipotle Mexican Grill (CMG 3.45%) fell 11.1% last month, according to S&P Capital IQ data. The fast-casual chain experienced slowing comps and lower margins in the third quarter; could these near-term issues be presenting investors with a buying opportunity?
So what: In its third-quarter report released on Oct. 20, Chipotle noted that its comparable-store sales rose by only 2.6% -- a significant deceleration from the 4.3% increase in the second quarter, and 10.4% jump in Q1. Chipotle's efficiency and profitability also declined during the quarter: Throughput decreased as Chipotle's store base handled an average of one fewer transaction during the peak lunch-hour period, and restaurant operating margin declined by 50 basis points, to 28.3% of sales, due primarily to higher labor costs.
The lower operating margins also led Chipotle's earnings per share, at $4.59, to come in slightly below Wall Street's estimates of $4.62. That was enough for investors to head for the exits, as the stock fell more than 5% on the news, and continued to decline into month's end.
Now what: Chipotle's challenges have intensified since October, with a major E. coli scare leading management to close 43 restaurants in Oregon and Washington state. This incident will no doubt impact sales in the near term, and could hurt the company's reputation should Chipotle be found guilty of any wrongdoing.
Still, much like Chipotle's lackluster third-quarter performance, these concerns appear to be more short term in nature. Chipotle's food sourcing and preparation techniques are widely considered to be some of the best in the industry, and the business remains one of the fastest-growing and most-profitable restaurant chains in the world.
The deceleration in comps is largely a function of comparisons to Chipotle's incredible fiscal 2014, in which the company enjoyed 16.8% comp growth on the back of significant price increases. The positive to this situation is that once the E. coli situation is settled, the company will face easier comp comparisons in the year ahead.
With Chipotle's stock now down nearly 20% from its 52-week high, patient, long-term investors may wish to view today's price as a buying opportunity.
