Many big companies are reporting earnings, and Chipotle Mexican Grill (CMG, Financial) is one of them. I have my eyes specifically on Chipotle’s earnings because I have been bearish on the stock, and I expect it to fall after earnings.
Hence, investors should short or buy put options before Chipotle reports its earnings after the market closes.
Taking a look at the estimates
Analysts are expecting Chipotle’s EPS to take a massive hit; they expect the company to post a loss of 95 cents per share. Given the extensive buybacks, I won’t be surprised if Chipotle manages to beat on EPS. However, Chipotle’s EPS would still be far lower than the $3.88 it reported in the year-ago period.
Chipotle has spent a lot of money to repair its tarnished brand image and will continue to do so. While spending to curb the damage is essential for Chipotle’s long-term success, it will hurt the company in the short term, as it will be impossible for Chipotle to justify its lofty valuation amid falling EPS and eroding fundamentals.
On the revenue front, analysts are expecting Chipotle’s sales to plunge almost 20% to $880 million. However, investors shouldn’t focus on the revenue decline and should instead focus on the same-store sales. Chipotle has managed to mask the revenue decline by opening new stores; however the company’s same-store sales numbers will paint the actual picture of its struggle.
According to Four Square, Chipotle’s comps are expected to drop roughly 30%, which would be disastrous for the stock given that Chipotle is already trading at a premium. Chipotle’s comps dipped over 26% in February (despite February having an extra day this year) and if the comps come in worse than last month, then it would seem that Chipotle’s efforts are not working.
The company has spent a lot of money, and it needs to show progress in order to sustain its valuation. However, as per the latest statistics, it still looks like Chipotle’s comps will fall by more than 25%, which could spell trouble for longs.
Conclusion
Investors should stay away from Chipotle or buy put options ahead of earnings. The company’s comps are still expected to decline and a bigger-than-expected drop in same-store sales will push the stock toward my $400 price target.
Disclosure: The author doesn’t have any position in the stock mentioned in the article.
