Is Chipotle Mexican Grill, Inc. (CMG) Stock A Buy Now?

  • Chipotle missed analyst expectations on two important fronts - comps and revenue.
  • The comps miss continued to batter CMG stock, which has now lost over 40% since last year.
  • 2017 promises to be better, but should you buy CMG stock after the recent crash?

It has been more than a year since Chipotle Mexican Grill, Inc. (NYSE:CMG) was hit with the biggest crisis in its history. Food safety issues have plagued the burrito maker since then, and third quarter results did nothing to assuage investor sentiment. The question for the third quarter was never about revenue, but about same store sales. Those numbers were disappointing, and the stock has plummeted since. Chipotle shares are now 40% cheaper than they were a year ago. Should you buy CMG stock following the recent crash?

Chipotle reported a same store sales decline of 21.9%, while the market was expecting a drop of 18.2%. As same store sales dropped below expectations, the company missed revenues estimates as well, reporting 3rd quarter revenue of $1.04 billion while analysts were hoping for $1.09 billion.

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"Even after the relative success of this summer's loyalty program, Chiptopia, Chipotle still has a long way to go to win back customers from the ongoing food safety scares starting this time last year," Kate Hogenson, strategic loyalty consultant at Kobie Marketing, told CNBC ahead of the earnings report.

Chipotle’s sales have now declined by more than 20% since last November and the way things are progressing, it could easily cross the twelve month mark. Chipotle has been aggressively offering discounts and temporary loyalty programs such Chiptopia to lure customers back into their stores, but, so far, such efforts have yielded very little results, while hurting their bottom line at the same time.

Also Read : Chipotle Mexican Grill Inc Stock A Great Pick For 2017

Falling same store sales will pile up an increasing amount of pressure on CMG. Chipotle’s stock has now lost more than 40% of its value since the start of the crisis, and the downward slide will only stop when same store sales numbers improve significantly. The real problem with third quarter numbers was that Chipotle didn’t show the improvement that market was expecting. At -21.9% same store sales growth, it’s definitely better than the previous quarter’s -26.5%, but not nearly as good as -18.2% that Wall Street was expecting. The revenue miss merely served to exacerbate the problem.

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The company has now decided to do away with its Asian food concept Shophouse, but decided to continue with its pizza business, Pizzeria Locale and burger chain plans. Back in September the company started an advertising campaign to address the food safety issues instead of shying away from discussing them and taking the discount route to win back customers.

Giving away a ton of free burritos is only going to bring people in for a really short duration, and once that is done, they are going to walk back into another store unless the company addresses the issue head on. Band Aids are not going to help cover up a deep cut, but, unfortunately, it took until now for Chipotle to realize this.

Nevertheless, the company now seems to be ready to address the issue directly, and we might see the effects of that move in the next two quarters if it bears fruit. Chipotle has raised hopes for a turnaround next year. During the earnings call the company said that same store sales will rebound in 2017, and that the company expects high single digit growth in comps. The outlook is indeed good news, but evidence of a turnaround is still a few quarters away. Until then the stock will remain under pressure.

Also see: The latest top technology stock picks and top auto stock picks from Amigobulls.

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  • I do not have any business relationship with the companies mentioned in this post.
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Comments on this article and CMG stock

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gmgravytrain
neutral
It's probably better to wait until the share price gets a little lower before buying. The P/E is now about 150 which is still a bit high. Wait for the share price to drop to $350 before buying. Once the buying starts the hedge funds will start piling in for the fast elevator ride back up. They have no choice if they expect to cover their losses.
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