One of the biggest mistakes the market continues making with Chipotle Mexican Grill (NYSE:CMG) is the expectation that the restaurant concept will return to AUVs and margin levels prior to the October 2015 health scare. The data points continue to support that Chipotle is already producing new normalized levels questioning the high multiples placed on the stock following the new CEO rally.
Image Source: Chipotle website
New Normal
For Q3, Chipotle reported that net income and EPS soared over 60% from the prior period. Both numbers sound impressive, but the key here is that the restaurant concept is still returning to normalized levels following the 2015 health scare.
Chipotle reported a 4.4% comp sales gain, but the number fell below the 5.0% analyst estimates. Again, the key here is that the company should have been able to produce higher comps off the 2016 lows. The AUVs for the quarter were $1,980 million, down from the 2015 peak of $2,532 million. The company is still only slightly bouncing off the Q3'16 lows of $1,914.
Wells Fargo (WFC) echoed this concern suggesting that new competition makes it impossible for Chipotle to recapture its past glory. The Wells Fargo team lowered 2019 EPS estimates to only $11.45.
The big reason that Chipotle launched from $250-lows prior to the February hiring of Brian Niccol as the CEO to the $500-highs in August is that his leadership would allow the company to return to those $2.5 million unit volumes and mid-20% restaurant level margins. The combination had analysts pushing 2020 EPS estimates all the way above $15 now, with expectations of a further jump to $20.
The crucial restaurant operating margin reached 27.9% in Q3'15 right before the health scare. The latest quarter saw margins slip back to only 18.7%. The number was impressively off the 2016 and
