Chipotle Mexican Grill
stock dropped on Wednesday as the company’s second-quarter earnings beat expectations but revenue fell short.
Chipotle (ticker: CMG) posted adjusted earnings of $12.65 a share, comfortably above the consensus call for $12.31 among analysts tracked by FactSet. Unadjusted earnings of $12.32 were slightly ahead of estimates for $12.29.
Revenue of $2.51 billion, however, was worse than projections for $2.53 billion. Same-store sales also came in softer than projected, growing 7.4% in the quarter, while analysts had expected a 7.5% increase.
Shares of Chipotle tumbled 8.5% to $1,911 in after-hours trading.
Expectations may have been too high going into the earnings report, leaving little room for error. Investors have been piling into the stock, driving up the share price and valuation. Chipotle stock is up 50% this year, and changes hands at 42 times forward earnings. For comparison,
McDonald’s
(MCD) has a price to earnings ratio of 24.9. Taco Bell parent company
Yum! Brands
(YUM) has a 24.6 price to earnings ratio.
Despite the slight sales miss, Chipotle executives aren’t seeing a broader slowdown in demand. Chipotle CEO Brian Niccol said in a call with Barron‘s that any softness in sales came from summer travel trends.
“As schools went out, we saw this shift where business moved to our more, I would say tourist towns where we have Chipotle, over the traditional hometown,” Niccol said.
Higher sales in the tourist towns partially helped make up softer sales in traditional markets, Niccol added, but Chipotle isn’t everywhere people traveled to this year, so it wasn’t a perfect trade-off.
Even so, foot traffic and the number of transactions continued to grow in the quarter at a healthy pace, Niccol said. Chipotle has largely bucked slowdown concerns, with the chain benefiting from consumers looking to make their budget stretch longer. Instead of paying for a sit-down restaurant, shoppers are turning to more affordable, fast-casual eateries, such as Chipotle.
“That’s a big reason why we’re seeing strength across all income cohorts is just because frankly, our value proposition I think has gotten stronger and stronger,” Niccol said.
For the third quarter, Chipotle sees same-store sales growing in the low- to mid-single digit range, slightly lower than estimates for a 5.9% increase. Chipotle expects to see pressure from inflation in certain food products in the third quarter, including beef, tortillas, and some rices.
Full year same-store sales will grow in the mid- to high-single digit range, the company said, in line with current projections for 7.5% growth.
There were some silver linings in Wednesday’s report. Despite inflation, Chipotle grew its restaurant-level margin by 2.3 percentage points to 27.5%, marking the best margins the company has had in almost 10 years, Niccol said.
The company is also starting to see results from its strategic plan, called Square One, which aims to improve its business fundamentals following the pandemic. Stores that have undergone retraining under the plan are seeing better productivity, Niccol said in a call with investors. Chipotle is also restructuring, for which it incurred a one-time $3.5 million charge.
Bulls are also optimistic about some of Chipotle’s investments in innovation. The company has launched new menu items, tested ways to automate guacamole production, and announced it was expanding to the Middle East with its first franchised restaurants.
Write to Sabrina Escobar at [email protected]
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