Shares of Chipotle Mexican Grill (CMG, Financial) have been tumbling since Chipotle touched its 52-week high of $499 in May 2017. The decline accelerated this week as Chipotle’s management warned investors about rising costs in a recent Securities Exchange Commission filing. But the market may have punished the stock a bit too much, opening up a nice opportunity for investors to buy in.
An excerpt from the Guidance Clarification filed by Chipotle (June 19):
“For the second quarter of 2017, we continue to expect food costs to be approximately 34.2% of sales, and marketing and promotion costs to be up approximately 20 to 30 basis points versus the first quarter of 2017 to 3.6%-3.7% of sales.
As a result, we expect other operating costs as a percentage of sales for the second quarter to be at or slightly higher than reported for the first quarter. For the full year, we continue to expect comparable restaurant sales increases in the high single digits, 195-210 new restaurant openings, and an estimated effective tax rate of approximately 39.0%.“
Chipotle expects food costs to account for 34.2% of sales during the second quarter, compared to 33.8% sales during the first quarter of this year. The company also announced that it will increase spending by 20 to 30 basis points to attract more customers through its doors. The double whammy of increasing food costs and increased spending does create a bit of a concern, but does that justify wiping out more than 7% of the company’s valuation?
Chipotle did not revise its same store sales expectation downwards, and it continues to expect comparable store sales to increase in the high single digits. And with nearly 200 restaurants expected to be opened during this year, the company’s ability to grow its revenues through fiscal 2017 remains intact.
Since the food safety fiasco that hit customer traffic hard, Chipotle has come a long way. Comparable store sales increased by 17.8% during the first quarter as the rate of decline kept coming down in the four quarters prior.
As the growth in same store sales indicates, the food safety issue has slowly moved to the background, and Chipotle is slowly but steadily re-building its brand.Â
The stock is trading around three times sales, which is much lower than the price-sales valuation commanded by restaurant segment leaders Starbucks and McDonald’s.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
