Chipotle: Zacks’ Bear of the Day Play

When it rains, it pours was never more true for a company than Chipotle (CMGFree Report) this year. The stock spent most of the year fighting to stay above the $400 mark, but since the company’s Q3 report in late October it is fighting to get back above it.

As the company still reels from the lingering after effects of their E.coli food poisoning scare last year, they reported that revenue decreased 14.8% to $1.0 billion and comparable restaurant transactions decreased 15.2% while comparable restaurant sales dropped 21.9%.Then, at a recent investor conference hosted by Barclays, Chipotle management admitted that it is now “nervous about the guidance” the company gave during its most recent earnings call.The fast-casual Mexican restaurant chain forecast Q4 same-store sales declines in the low single digits. For 2017, the company sees a same-store sales increase in the high single digits and earnings per share of $10.Analysts at J.P. Morgan and Instinet cut Chipotle’s price target in the days following the conference. Describing the news as “disappointing” the analyst from JPM cut his price target from $425 to $375 while Instinet analysts also lowered their price target to $333 from $372.Activists, Rich and PoorAlso troubling the company has been pressure from activist investor Bill Ackman who recently won a battle to replace four members of Chipotle’s board.But more troubling is the conundrum the company has between keeping reliable labor and maintaining quality customer service. During the food safety crisis of the past year, management found itself having to pour new procedure on staff to keep stores clean and protect customers.The result was a higher turn-over in staff which has negatively impacted customer service overall. And that high turnover impacts costs at a time of declining revenues, creating a double-edged sword of their own design. One could say that unskilled restaurant laborers have their own brand of activism when the job just isn’t worth it.

And this is a new black eye for Chipotle that most investors didn’t see coming. More on Chipotle’s fall from customer service grace in a moment.In response to all this heat, analysts slashed their EPS estimates for full-year 2016 to $1.80 from $3.61 since the late October report. And 2017 profit projections were cut from $9.93 to $9.37. But in the two weeks since that conference, next year’s consensus EPS estimate has fallen further to $9.13.As the Burrito TurnsWhile Chipotle has survived the food-borne health scare as a company, they have lost their growth momentum as potential new customers choose other dining options. You can imagine the quick and easy decision that many people might make to go elsewhere when the stigma of food poisoning lingers.But now they have new issues with customer service as they over-burden their low-wage staff with excessive cleaning procedures. This is one problem many analysts, myself included, did not expect. Here’s how I viewed Chipotle’s stellar position in fast-casual with stand-out customer service in July of 2015, ironically right before the beans hit the fan…Chipotle’s Secret Sauce of SuccessThe business certainly still has a fighting chance. It just takes a while to re-work one’s image in the minds of the public. And they’ll figure out the labor issues too.But until the earnings estimates turn back up, it’s time for hungry investors to find other delicious growth stories. The Zacks Rank will let you know.So Where Are the Profitable Trades?Be sure to short or avoid this Bear Stock of the Day. Now would you like to see Zacks’ recommendations that have the best profit potential? Starting today, for the next month, you can follow all our private buys and sells in real time from value to momentum . . . from stocks under $10 to ETF and option moves . . . from insider trades to companies that are about to report positive earnings surprises (we’ve called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors. Click here for all Zacks trades >>

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