Fast-growing restaurant chain Chipotle (NYSE:CMG) announced its preliminary fourth-quarter results ahead of its presentation at the ICR Conference. Productivity growth at the restaurant appears to be slowing, as same-store sales climbed just 3.8% year-over-year. Overall revenue growth remains strong, up 17% year-over-year to $699 million, slightly above consensus estimates. However, earnings look incredibly disappointing, as the firm estimates earnings per share of $1.92-$1.97 - well below the consensus estimate of $2.09 and only a small increase from the same period a year ago.
According to the firm's press release, food costs jumped 130 basis points to 33.5% of sales - the main culprit behind restaurant operating margins dropping 150 basis points compared to the same period a year ago. Though full results will not be available until February, we think the preliminary results underscore why we believed shares of the burrito maker were significantly overvalued at its recent peak (over $400).
After Chipotle enjoyed years of growth without competition, Taco Bell (YUM) has finally stepped in to the highly profitable market ("high-end" burritos), a move that we think is now eating into Chipotle's sales expansion. Further, the company's focus on high-quality ingredients, while good for the consumer, puts pressure on the bottom line during times of food inflation. Chipotle's products already have a relatively high price tag, and we think the firm knows its ability to increase prices from current levels is not that great. Management believes food cost increases will ease in 2013, but we think increasing profits could remain a challenge.
After the company's tumble, shares of Chipotle are fairly valued, and we do not think establishing a long position in the portfolio of our Best Ideas Newsletter provides a favorable risk/reward at this time. Although we could see re-accelerating profitability expansion in 2013, the firm's path to growth is becoming increasingly more difficult to navigate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.