Our last update regarding Chipotle was 12/18/2015. We didn’t believe there would be any new announcements from the Center for Disease Control, or the Company, over the holidays, and there wasn’t. We expected that the pace of traffic would remain weak through the remainder of December, our estimate for December sales being a negative 20-25%. We currently have no reason to be more optimistic than before, and would guess the reported decline would more likely be above 25% than below.
The stock has sold off 90 points (from $540 to $450) since December 18th, as reality has begun to set in among analysts. Almost every day, another of the 25-30 analysts following CMG lowers an estimate, and that keeps pressure on the stock. We believe that process has further to go.
Earnings expectations depend on two major fundamental factors, the pace of sales and the cost of doing those sales. When sales are down and costs are up (both materially) the combination is lethal. We therefore believe that even the analysts who have revised numbers downward are underestimating the damage. The latest “consensus” estimate from Bloomberg is $2.50 for Q4 and $15.99 for calendar 2016. Recall that the last guidance from management had $2.65 at a midpoint. We believe the next guidance will be substantially below the $2.50 analysts are using, below $2.00 we suspect. The worst of the revised estimates for 2016 is at $14.00 but the Bloomberg consensus is currently still at $15.99. Since we believe that even $14.00 could prove to be optimistic, lots of further revisions and downgrades could be ahead of us.
Nobody, including ourselves, can predict with assurance how this saga plays out. We read one comparison recently to Lululemon, a high end sportswear brand that had its image tarnished with a line of apparel that was well below their standard for quality. LULU sales were sharply down for a couple of quarters then rebounded after management did their “mea culpa”, took back some product, and resumed production of better quality goods. There are major differences. Nobody got sick at LULU, and the new goods were “transparent” in terms of the improved quality. A customer at CMG doesn’t need the uncertainty, has lots of dining options, and certainly doesn’t want to expose family members to health risks that are completely unnecessary. We could go on, but the point is made in terms of ongoing uncertainty for CMG diners and stockholders in turn.
Next week, on Wednesday, January 13th, Chipotle management is scheduled to speak at the “ICR Conference” in Orlando, FLA. We expect an update from management on Monday, Tuesday, or Wednesday A.M. regarding recent sales and costs.
Anything management says, for quite some time, will only serve to refresh everyone’s memory of this unfortunate incident. As one of our very knowledge restaurant industry associates put it: “This is a very complicated situation”. From an estimate standpoint, if $14.00 can be considered a decent guess for 2016, CMG is trading at 32x that number, not a bargain by any means. At the moment, analysts really have no basis on which to project sales trends or the new food cost structure, so earnings projections are little more than a “crapshoot”. From a customer standpoint, the battle between the “Loyalists” and the “Betrayed” will continue to play out. From a stock standpoint, especially in an uncertain economy and an often paranoid stock market, ownership of CMG is a potential aggravation that investors don’t need.