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Chipotle Shares Fall After Strong Earnings: Are Investors Right to Flee the Stock?

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Chipotle (CMG - Free Report) reported its third quarter results after the closing bell Tuesday and crushed our earnings and revenue estimates by 19.38% and 1.76%, respectively. Despite its recent drop, the company’s stock has risen over 83% YTD and has continued to report strong comp sales that reflect its innovative initiatives.

The strong comp sales have been driven in part by the recent menu innovation and growing online presence. However, despite the strong performance, investors were not too pleased with what they saw from the restaurant giant in Q3.

Another Stellar Quarter

Chipotle reported another robust quarter where they saw its top and bottom line grow year over year and digital sales grow 87.9%, accounting for nearly a fifth of Chipotle’s sales this quarter. Since its launch in March, Chipotle has added 7 million members to its loyalty program. Comp sales climbed 11%, which was its biggest leap in over two years.

Chipotle’s CEO, Brian Niccol, stated, “We’re pleased with our overall results in the quarter, which reflects further progress on our key strategic initiatives to provide a great guest experience and position Chipotle to deliver above industry growth for many years to come.”

Niccol is credited with helping lead the company’s turnaround after Chipotle’s growth and reputation came under question in 2016. The CEO helped launch the company’s rewards program and has made several innovative menu changes in his tenure. He told analysts on the conference call that in addition to long-awaited quesadillas, Chipotle is also testing salads.

Delayed Store Openings Rain on the Parade

Despite the mostly solid report, Chipotle’s shares took a hit after the earnings release and closed down over 5% in intraday trading, Wednesday. Analysts pointed towards the number of stores Chipotle expects to open this year; it now forecasts that it could open fewer than 140 to 155 new stores in fiscal 2019.

In 2020, the chain plans to open between 150 to 165 new locations, with more than half including a “Chipotlane.” The company has been testing special drive-thru lanes for digital order pick-up. As a result of successful tests in 20 restaurants, the chain is now planning on putting Chipotlanes in half of its restaurants currently under construction.

These new drive-thru lanes could bolster earnings going forward, as the margins are bigger on pick-up orders. But, it takes longer to build those drive-thru restaurants, which could delay overall store expansion into 2020.

Analysts also point towards the stock’s sky-high valuation for the drop off after the report was released. CMG currently trades around 61X its forward earnings, which is a huge premium compared to other competitors in the restaurant sector like Yum! Brands (YUM - Free Report) , Starbucks (SBUX - Free Report) , McDonald’s (MCD - Free Report) , and Jack in the Box (JACK - Free Report) . Jefferies analyst Andy Barish wrote that he believes Chipotle’s same-store sales growth and profit margin drivers are already reflected in the stock, explaining why Wall Street was so adamant about the slowed store expansion.

Bottom Line

Chipotle delivered yet another solid quarter for its shareholders and is confident about continuing its impressive growth trajectory in the near future. Brian Niccol continues to lead the company’s innovative initiatives and plans to continue to come up with creative ways to drive not only store traffic but digital traffic as well.

Investors are likely comparing Chipotle’s growth and valuation to dictate their decision to sell or buy, but as of now, Chipotle seems to be keeping up its end of the bargain in terms of growth. Chipotle’s stock currently sits at a Zacks Rank #2 (Buy) as it has seen its earnings revisions trend higher.

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