Why Chipotle Earnings Left Investors Sour

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When Chipotle Mexican Grill Inc. (NYSE: CMG) released its most recent quarterly results late on Tuesday, the burrito chain said that it had $1.55 in earnings per share (EPS) on $1.11 billion in revenue. The consensus estimates had called for $1.32 in EPS on revenue of $1.12 billion. In the fourth quarter of last year, Chipotle said it had EPS of $0.55 and $1.03 billion in revenue.

During the quarter, comparable restaurant sales increased 0.9% year over year as a result of an increase in the average check, including a 2.4% impact from menu price increases taken in select restaurants, partially offset by a decrease in transactions.

At the same time, food costs were 34.2% of revenue, a decrease of 110 basis points compared to the fourth quarter of 2016. The decrease was driven by the benefit of the menu price increases, cost savings initiatives related to paper and packaging products, and relief in avocado prices.

The restaurant level operating margin was 14.9% in the quarter, an improvement from 13.5% in the fourth quarter of 2016. The improvement was driven primarily by decreased promotional activity and lower food, beverage and packaging costs as a percentage of revenue.

Looking ahead to the 2018 full year, the company expects to see comparable sales increase in the low single digits, with around 130 to 150 new restaurant openings. Consensus estimates call for $9.98 in EPS and $4.88 billion in revenue for the year.

Steve Ells, founder, board chair and chief executive, commented:

During 2017, we have made considerable changes around leadership, operations, and long-term planning and it is clear that, while there is still work to be done, we are starting to see some success. 2018 marks the 25th anniversary of Chipotle, and I am encouraged by the dedication all of our guests and employees have to this brand. Our focus this year will be to continue perfecting the dining experience, enhancing the guest experience through innovations in digital and catering, and reinvesting in our restaurants. We are making good progress on our search for a new CEO who can improve execution, drive sales and enable Chipotle to realize our enormous potential.

Shares of Chipotle traded down about 10% at $272.60 Wednesday morning, with a consensus analyst price target of $328.78 and a 52-week range of $263.00 to $499.00.