Chipotle Mexican Grill, Inc. Falls Along With Wall Street Pessimism; Lynne Collier Cuts Price Target

Canaccord's Lynne Collier anticipates both CMG's traffic as well as margins to remain under hot water.


Chipotle Mexican Grill, Inc. (NYSE:CMG) shares are falling 11%, and one wary analyst has even more cause to be frustrated with the Mexican food chain- even amid the company’s compelling comeback initiatives.

In a quarter that saw “unprecedented levels of marketing and new product launches,” with CMG at last introducing Queso to hungry consumers, Canaccord analyst Lynne Collier is critical that “traffic remains elusive.”

With continuous traffic challenges circling the stock, sinking 3% quarter-over-quarter, the analyst reiterates a Hold rating on CMG stock while cutting the price target from $325 to $300, which implies a close to 10% upside from current levels. (To watch Collier’s track record, click here)

“We continue to believe that competitive intrusion remains a major factor in the company’s challenged performance given explosive unit growth in the fast casual space over the last several years,” Collier comments.

“Comps in line, but restaurant-level margins disappoint,” continues the analyst, after the fourth quarter saw CMG post an EPS beat that rode a tax benefit advantage of $0.21 from new domestic tax legislation. Therefore, the company’s EPS of $1.55 beating both Collier’s projection as well as the Street’s of $1.35 is taken with a grain of salt. Noting a “negative ‘Chiptopia’ offset,” comps met the Street’s expectation for +0.9%- and yet, what Collier highlights here is that traffic was “down.”

Moreover, “Menu price was +2.4% and CMG experienced a +2.0% increase in mix related to the launch of Queso. Compared to our model, CMG’s restaurant-level margin of 14.9% was 120 bps below our estimate, driven by higher other operating, as well as labor and occupancy,” explains the analyst.

Another disappointment boils down to CMG’s 2018 guide, where even though the company reiterated its new unit opening target, the CMG team offered a low-single digit comp range for the new year and a 30% to 31% effective tax rate. The company calls for better growth in the back half of the year.

Additionally, the company looks for restaurant-level margins to range between 17.5% and 18.5%, against a pre-release of Metrix expectations around 19.0%; along with $330 million in SG&A compared to pre-release Street expectations of roughly $312.0 million.

In reaction, the analyst is lifting 2018 EPS expectations (to mirror the U.S. tax reform) from $8.60 to $8.94, but decreases EBITDA from $561.6 million to $526.4 million. Ultimately, “we expect traffic and margins to remain pressured,” Collier surmise.

TipRanks shows analyst sentiment that backs Collier’s cautious perspective. Out of 24 analysts polled in the last 3 months, 4 are bullish on Chipotle stock, a whopping 15 remain sidelined, and 5 are bearish on the stock. With a return potential of 12%, the stock’s consensus target price stands at $310.35, suggesting optimism still swirls for CMG’s turnaround.