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Shares of Chipotle Mexican Group (CMG) fell over 10% in after hours trading on Thursday. The operator of Mexican food restaurants reported its third quarter results and issued a downbeat outlook for next year.

Third Quarter Results

Chipotle Mexican Group reported third quarter revenues of $700.5 million, up 18.4% on the year. Growth was driven by 36 new restaurant openings and a 4.8% increase in comparable sales. Revenues missed analysts expectations of $703.5 million.

Operating margins rose by 70 basis points to 27.4% as the company still benefited from price increases at the end of 2011. Net income rose by 19.6% to $72.3 million. Diluted earnings per share rose 19.5%, in line with net income, to $2.27 per share. On average, analysts expected the company to report earnings of $2.29 per share.

Same store sales growth slowed further to 4.8% as communicated at the presentation of the second quarter results. Growth was predominantly driven by an increase in traffic, not so much pricing. In comparison, second quarter same store sales growth came in at 8.0%. Same store sales growth came in line with analysts who expected a growth rate of 4.9%.

Shares of Chipotle have fallen almost 40% from their peak earlier this year. In a reaction to falling share prices, the board of directors have approved an additional share repurchase program of $100 million, boosting the current authorization to $134.7 million.

CEO Steve Ells commented on the results, "We have always believed that good food should be affordable and accessible to everyone. We're delighted that our continuing efforts to serve the very best food made from high quality ingredients raised with respect for animals, the environment, and farmers and that is freshly prepared using classical cooking techniques is resonating with our customers. This is helping us realize our vision of changing the way people think about and eat fast food."

Outlook

For the full year of 2012, Chipotle expects to open 155-165 new stores, after opening 123 stores in the first nine months of the year. Chipotle guides for mid-single digit growth in comparable restaurant sales, after reporting a growth rate of 8.3% for the first nine months of 2012.

For 2013, the company expects to accelerate store openings to 165-180 new restaurants. Disappointing is the guidance of flat to low-single digit growth in comparable restaurant sales.

Valuation

Chipotle Mexican Grill ended its third quarter with $421.1 million in cash and equivalents. The company operates without any debt, for a comfortable net cash position.

For the first nine months of 2012, Chipotle generated revenues of $2.03 billion. The company net earned $216.6 million, or $6.80 per diluted share. At this rate the company is on track to report annual revenues of $2.7 billion. Earnings could come in around $280 million, or $8.75 per share.

Factoring in a 10% decline in after hours trading, the market values Chipotle at roughly $8.2 billion. This values the operating assets of the firm at around $7.8 billion. Given the full year 2012 estimates, this values assets at 2.9 times annual revenues and 28 times annual earnings.

Currently, Chipotle Mexican Grill does not pay a dividend.

Investment Thesis

Year to date, shares of Chipotle Mexican Grill trade with losses of roughly 25%. Shares started the year at $340 per share and steadily rose another $100 to peak at $440. In July the company published a disappointing set of second quarter results, prompting shares to fall $100 in a single trading session, after same stores sales growth was coming to a standstill. Shares temporarily rose back to $340, but fell through the $300 mark after hedge fund David Einhorn advised to short the shares, which now trade around $255.

Over the past five years, shares are still trading with gains of 130%. The company doubled its annual revenues from $1.3 billion in 2008 to an expected $2.7 billion in 2012. Net income rose from $78 million, to an anticipated $280 million.

Of interest is that the company notes that an uncertain economy and increased competition are impacting its business. Lower consumer confidence levels, hurt by discussions about a fiscal cliff, result in an uncertain business environment. Furthermore, Yum! Brand's (YUM) Taco Bell unit has began offering higher-priced burritos under its new "Cantina Bell" menu. The offerings boosted same store sales growth rates of the unit to 7% over the past quarter.

After a 40% fall in share prices the short thesis has become a little less attractive, despite the poor guidance for same store sales growth in 2013. Restaurant openings are expected to accelerate, and depending on market conditions, I might close out the short position in the coming days.

Source: Chipotle Mexican Grill - Poor Same Stores Sales Growth Outlook For 2013 Send Shares To Fresh Lows