Chipotle: Zacks’ Bear of the Day Play

Chipotle Mexican Grill, Inc. (CMGAnalyst Report) is still struggling to recover from a food-borne illness scare that shut some of its restaurants late in 2015. This Zacks Rank #5 (Strong Sell) is expecting to see a wider loss in the first quarter than previously anticipated.

Chipotle offers fresh Mexican food at more than 2,000 restaurants across the United States. It also operates 13 ShopHouse Southeast Asian Kitchen restaurants which offers fresh Asian food offerings.

The company is also an investor the owner of 3 Pizzeria Locale restaurants.

Lowers First Quarter EPS Guidance

On Mar 16, at a consumer and retail conference, Chipotle provided an update on February and March same-store-sales and how marketing was working to bring customers back to the restaurants.

It mailed out over 5 million free entree coupons across America which were good for the period from Feb 8 to Feb 24.

Many of those were cashed in, but it’s unclear if those were already existing customers or just people eating at a Chipotle for a one time free meal.

Comps showed improvement over the prior few weeks, however. That indicates that the worst may be over.

January comps were down 36%. February was down just 26.1%, although that included 2.6% for the extra Leap Day.

The first week of March, comps improved again, falling 21.5%. But the second week, they jumped back up to a decline of 27.3% when a Boston store was closed temporarily.

Given the success of the free entree, which obviously is a money-loser every time someone cashes in a coupon, Chipotle said it would take a wider loss in the first quarter. Previously, it had anticipated breaking even but now sees a $1.00 per share loss.

Improvement Expected to Continue

No company, not even one with as strong of a brand as Chipotle, can expect to bounce back from a public relations issue such as this immediately. It will take time.

The comps are expected to slowly improve in the second quarter.

But that doesn’t mean that the analysts haven’t been slashing earnings estimates.

The 2016 Zacks Consensus Estimate has plunged to $8.02 from $16.92 in the last 90 days. I would look for it to be cut again following this latest update.

The tone at the retail conference seemed to indicate that the turnaround was going to take longer than previously believed.

Shares Not Cheap

After the last earnings report, the shares sank to a new 52-week low, but they’ve rebounded off those lows.

Are investors too optimistic?

Shares are not cheap. They still trade with a forward P/E of 62.

That is much higher than any of its peers, none of which have been giving away free entrees to millions of people.

Investors used to be willing to pay a high multiple for Chipotle’s tremendous growth. But where’s the growth right now?

Investors would be much better off looking at Carrols Restaurants Group (TASTSnapshot Report), which owns 665 Burger King restaurants. It’s a Zacks Rank #1 (Strong Buy) and is expected to grow earnings by 39% this year.

Or even Domino’s Pizza Inc. (DPZAnalyst Report). Domino’s is a Zacks Rank #2 (Buy) and is forecast to grow earnings by 21% in 2016.

[In full disclosure, the author of this article owns shares of DPZ.]

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec and she also hosts the Zacks Market Edge Podcast on iTunes.

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