Chipotle Goes Down For The Count And Gets Right Back Up

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About: Chipotle Mexican Grill, Inc. (CMG)
by: The Specialist
Summary

CMG reported lackluster Q2 results.

Same-store sales growth was a fraction of recent history.

The stock is getting killed following the report but then made a dramatic recovery.

Chipotle Mexican Grill (NYSE:CMG) reported fiscal second quarter results on July 21. As I expected, CMG's same-store sales growth was a major disappointment and likely because of the lack of pork supplies at about one-third of its locations leading fans of that meat not to come back as often.

When you have a huge bubble-like valuation based on the expectation of continued hyper growth, the stock cannot afford any weakness in its reports. The knee-jerk from the market was the stock getting killed. However, it made a dramatic recovery and actually ended up green in after hours.

Revenue was up 14% and EPS was up 27%, both in-line with expectations and both decent numbers. However, it was more due to opening of new restaurants rather than the more important to investors same-store sales growth metric which was only 4.3%.

Same-store sales has been decelerating for several quarters but this is the first time in a while they fell below double digits and did so by a lot. Even just the sequential quarter before the metric was a strong 10.4%.

Co-CEO Steve Ells almost admitted it was a bad quarter. He stated, "We feel good about second quarter results" which is vastly weaker language than the sequential quarter before where he said, "We are very proud of our start to 2015."

Buried down in the press release CMG admits that most of the lackluster 4.3% growth was just a result of prices being raised and not from traffic.

In after hours trading, the stock sunk down to near $600 but then made back all of its losses and then some, actually adding $15 extra per share and finishing at almost $689 as the conference call was playing.

Why the sudden surge? I suspect the first thing that was music to investors' ears came when Ells stated, "As we continue to ramp up our pork supply, we expect to regain any lost sales tied to this outage." This may have alleviated the weakness in the report and allowed investors to treat it as a temporary shortfall and not something sustainable even partially.

The whole theory of the same-store sales metric is a measurement of the strength of a restaurant's brand. With CMG management pinpointing the deceleration purely on a temporary shortage of one of its key meats, and guided that the sales will come back in full, the same-store sales metric suddenly became marginalized.

Going forward, CMG expects more of the same lackluster same-store sales growth for the year but it was only mentioned in the call that guidance didn't account for any bounce back from pork supply restoration.

While this is not the type of guidance that deserves a premium valuation multiple management gave supposedly a good explanation for it.

Still, even if you take analysts expectations for EPS of $20.57 for the 2016 fiscal year when pork supplies are expected to be fully stocked the share price still seems overvalued.

Based on a current share price of around $688 as of this writing that puts the P/E at around 33 whereas the average growth restaurant P/E is somewhere in the 20s. I believe CMG still has a further significant leg down to go at least long term even if the street is willing to forgive management for the pork shortage in the near term.

Disclosure: I/we 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.