Chipotle: 4Q Guidance Disappoints Investors

Chipotle reported 3Q earnings after market close, and the pre-market is indicating an opening price down 8%. The company reported 3Q EPS of $4.59, which fell slightly short of consensus estimates of $4.62. Results were short largely due to lower-than-expected operating margins. However, the investor focus was primarily on management's commentary on sales trends.


Chipotle Guides to Lower than Expected Sales Trends

Chipotle's same store sales were particularly strong in 2014, driven in part by pricing, marketing efforts, and improvements in throughput. In 2015, same store sales have since decelerated due to difficult comparisons and a pork shortage that negatively impacted comps by ~200 bps. Going into 3Q, the predominant investor expectation was that 3Q would see the lowest performance of the year due to 3Q14 being the most difficult comparison as well as the pork shortage representing another 100-200 bps headwind. Chipotle largely fixed the pork shortage issue by the end of 3Q, as carnitas was back in 90% of stores by quarter end. Additionally, the company increased marketing spend in hopes of driving increased traffic to stores. As a result, with the 200 basis point headwind on same store sales gone, and several other tailwinds that could potentially benefit the company, many investors had high expectations for same store sales to reaccelerate in 4Q to ~4%, and to accelerate further in 2016 to 5%+.


However, the company put a serious dent in this thesis during their 3Q conference call, as they described trends quarter-to-date in October as being "choppy," and guided to 4Q same store sales of about in-line with 3Q comps of 2.6%. Management also noted that trends in August and September were below 2.6%. As a result, we're left with same store sales that have not inflected as many investors expected. With increased uncertainty surrounding the bull thesis and downward revisions for projected estimates, the stock has been revalued downwards.


New Store Openings a Bright Spot

While the comp guidance left a lot to be desired, the quarter was not all negative. Specifically, management did increase its guidance for new store openings to 220-235 (from prior guidance of 190-205+). This was a nice positive, as one leg of the Chipotle story is their new store openings, which are expected to drive roughly 2/3 of their total sales growth in the near-term.  With an increased rate of new store openings, this should give sales growth a bump up in estimates. Unfortunately, this likely isn't enough to offset the perceived negative from same store sales, which is a more important metric that speaks to the core health of the business.