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Why Is Chipotle (CMG) Down 10.7% Since the Last Earnings Report?

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A month has gone by since the last earnings report for Chipotle Mexican Grill, Inc. (CMG - Free Report) . Shares have lost about 10.7% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Chipotle Tops Q2 Earnings Estimates, Revenues Lag

Chipotle reported second-quarter 2017 earnings per share (EPS) of $2.32, surpassing the Zacks Consensus Estimate of $2.16 by 7.4%. The figure also increased significantly from the prior-year quarter earnings of 87 cents, given a substantial rise in revenues.

Total revenue rose 17.1% from the year-ago quarter to $1.17 billion driven by new restaurant openings and solid comps growth. However, revenues missed the consensus mark of $1.18 billion by over 1%.

Behind the Headline Numbers

Comps grew 8.1% in the quarter. The increase was mainly on the back of improved customer traffic, along with an increase in average check given reduced promotional activity. However, the comps rise was lower than the prior-quarter growth of 17.8%.

Meanwhile, food costs, as a percentage of revenues, decreased 10 bps to 34.1% given reduction in food waste, improvements in the company’s food safety procedures, lower paper and packaging costs as well as benefit of menu price increases in select restaurants, somewhat offset by higher avocado prices.

General and administrative expenses comprised 6% of the total revenue, reflecting a decrease of 110 bps year over year, chiefly due to sales leverage.

Restaurant level operating margin was 18.8%, up 330 bps from 15.5% recorded in the year-ago quarter. The upside was primarily driven by sales leverage coupled with more efficient scheduling and deployment of the company’s managers and crew.

Marketing and promotional expenses, as a percentage of revenues, decreased 70 bps to 3.7% due to lower promotional costs and sales leverage.

Guidance for 2017

Chipotle reiterated its previously announced guidance for full-year 2017 as comps are still projected to increase in high single digits. Meanwhile, new restaurant openings are anticipated in the range of 195–210.

Currently, the company expects G&A to be in the $290 million range for the year, slightly lower than previous guidance of $300 million.

It is also working toward its stretch goal of achieving adjusted earnings per share of $10.00 and restaurant level operating margin of 20% for the year.

How Have Estimates Been Moving Since Then?

Following the release, investors witnessed a downward trend in fresh estimates. There have been eight revisions lower for the current quarter. While looking back an additional 30 days, we can see even more downside. There have been 12 moves down in the last two months. In the past month, the consensus estimate has shifted lower by 17.4% due to these changes.

VGM Scores

At this time, Chipotle's stock has a great Growth Score of  A, though it is lagging a lot on the momentum front with an F. The stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for growth based on our styles scores.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.



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