Despite Chipotle Mexican Grill (CMG, Financial) spending heavily to repair its brand image, the company has failed to show any signs of recovery. Although it has bucked the trend of falling sales and earnings, the easy year-over-year comparable has made its recent preliminary results appear better than they actually are.
While Chipotle has already said its earnings and revenue for the upcoming quarter are going to fall short of expectations, the stock, for some reason, has rallied considerably since the announcement.
While the company’s profit margins have fallen considerably over the last few quarters, its sales have witnessed very slow recovery. On account of increasing expenses, Chipotle's trailing price-earnings multiple has climbed up to 177, thereby making the stock very expensive to own.
The company’s timid growth cannot do justice to its premium valuation. In addition, it still expects its marketing expenses to go up. Last month, Chipotle hired new ad agencies to kick-start what is expected to be a big ramping up of marketing expenses in 2017. It expects to spend about 3% of its sales on marketing this year.
Given the shallow success of the company’s previous marketing initiatives, I think investors should be cautious about owning the stock going forward. While it may appear the stock has bottomed, investors will punish it for the slightest mistake due to its high valuation. Chipotle is trading at a huge premium and the company’s growth is not justifying its valuation. As a result, a minor misstep can send the stock tumbling, which is why I think investors should continue avoiding it.
Conclusion
Chipotle has been attempting to revamp its image for over a year now. Despite these attempts, its same-store sales remain lower than when the E. coli breakout happened. Chipotle has spent a lot of money to attract customers and sales, but it has not been as successful as it had hoped. With marketing expenses expected to rise, investors should continue avoiding Chipotle. Due to its steep valuation, buying the stock at current levels does not make sense.
Disclosure: No position.
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