Chipotle Is Lying to You

As a fan of Chipotle Mexican Grill (NYSE:CMG) -- the stock, the chain, and the carnitas bowl that I will inevitably order later this week -- I was anxiously awaiting the quick-service restaurant's fourth-quarter report last week.

The numbers were great. Revenue climbed 12%. Comps inched 2% higher. Perhaps more importantly, net income soared 86%, to $0.99 a share, blowing away the analysts who were braced for a profit of only $0.81 a share.

The stock, however, inched lower at Friday's open -- until an analyst upgrade and generally buoyant market pushed the shares to a higher close.

• "Upscale burrito seller Chipotle disappointed investors by repeating its forecast for flat 2010 same-restaurant sales, despite a surprise 2 percent gain in sales at established restaurants in the latest quarter," writes Reuters.
• "The company said it expects sales at restaurants open at least year to be flat for 2010, and shares fell in after-hours trading," reports Associated Press.

It's certainly true that Chipotle is bracing shareholders to expect flat comps this year. The kicker is that it's been telling analysts this for months. This isn't a bombshell. However, if I can be so bold as to peel back the burrito wrapper, I don't think it's going to happen.

Chipotle, my friends, is a big, fat liar.

More fizz than flat
Chipotle has managed to deliver positive comps during the darkest stretches of the recession. Why should they turn lower now?

Let's go over a few of the possible scenarios where comps may be flat to negative.

• The economy becomes unhinged and folks eat out less? It's possible, but the long-term trends indicate otherwise.
• Chipotle's expansion into existing markets cannibalizes sales at older units? This happens often in the restaurant industry, but if McDonald's (NYSE:MCD) was consistently growing comps before a rare stateside slip last month with tens of thousands of restaurants, I think Chipotle has plenty of elbow room before a shiny new Chipotle impacts an older unit a couple of miles away.
• Menu-widening initiatives with new items at lower price points can drive average tickets lower? This is the scenario where comps would slip despite an uptick in traffic, unlike 2009 where higher prices were enough to keep comps positive despite a slowdown in burrito seekers. However, Chipotle has been testing its "Low Roller Menu" for nearly a year. If it doesn't work, it's not going to go national.

The only other possibility -- it would seem -- is that Chipotle is lying to us. Again!

Profit from the past
Every quarter, Chipotle provides guidance to give analysts a feel for how things are shaping up. It doesn't go right out and give a bottom-line target, but Wall Street soaks in the expansion, comps, tax rate, and diluted share count projections in drumming up profit targets.

Chipotle has been blowing through them like me in front of a carnitas bowl.

Source: Yahoo! Finance.

Does this sound like the kind of company that is going to flatline on comps this year?

A few of our newsletter analysts interviewed CFO Jack Hartung last spring. He shared a recessionary trend he was seeing in some markets, where lunchtime sales would falter earlier in the week before bouncing back on Friday. The assumption is that folks are out of work, holding back on those $7 burritos as a defensive measure, only to splurge when Friday calls for a little tasty escapism.

"When I see that in a market, I see that as a great sign that people still want to come to Chipotle and they are just being held back for economic reasons," Hartung said.

In short, even a Chipotle executive is suggesting that his chain should be performing better when the economy turns. Popular workplace lunch spots with high-quality quick-service eats -- Chipotle, Panera Bread (NASDAQ:PNRA), the prepared foodstuffs at Whole Foods (NASDAQ:WFMI) -- are doing OK now, but they'll be rocking once the recession is fading in the rearview mirror.

It pays to lie
It's not a bad thing when Wall Street underestimates your potential. Some of the market's darling stocks seem to manage expectations, even the ones that don't provide any guidance at all.

Chipotle's stock has more than doubled since bottoming out 15 months ago. It's not a coincidence that it has obliterated analyst bottom-line targets along the way.

Let's go over a few hot stocks that have smoked the pros over the past four quarters.

• Apple (NASDAQ:AAPL) is the textbook example. It has been landing ahead of Mr. Market for years. Over the past four quarters it has delivered upside surprises of 64% or better.
• Green Mountain Coffee Roasters' (NASDAQ:GMCR) past four quarters have resulted in positive surprises of 38%, 29%, 3%, and 69%.
• Ford (NYSE:F) has benefitted from weaker rivals, and it shows. It has consistently topped quarterly expectations by a huge margin over the past year.

So why do I think that Chipotle is lying by low-balling its guidance on comps? If history is any kind of teacher, the market rewards liars when they overdeliver.