Jeffrey Gundlach of Doubline Capital recently indicated he will present a short trade in Chipotle shares at the upcoming Ira Sohn Conference. Einhorn will also be presenting at the conference, but the hedgie hasn't said what he will be speaking about. "[We] think the stock is still overvalued relative to what we believe will be near-term below trendline growth," Andy Barish, a Jefferies analyst, wrote in reaction to Chipotle's better-than-expected first quarter earnings. Barish rates shares 'underperform' with a $265 price target. Chipotle shares remain 16% below record highs of $440 a share hit last April.
Still, it may only take another quarter or two for Chipotle to dispel concerns raised in recent earnings and those pitched by vocal investors who are betting against the company's shares. Chipotle's first-quarter earnings generally showed a stabilization in growth trends, with comparable store sales rising 1%, as cost controls and better-than-expected revenue helped to drive a significant beat. Revenue rose 13% to $726.8 million, helping to drive profits of $2.45 a share for the quarter, beating consensus forecasts of $2.13 in EPS, according to Bloomberg data.
While food costs in the quarter rose significantly and represented about 33% of revenue, Chipotle indicated rising commodity price-based expense has run its course. Unseasonably cold weather in many parts of the U.S., the so-called "fiscal cliff" and tax increases, meanwhile, didn't dampen consumer demand for Chipotle burritos. Chipotle's first-quarter earnings signal the company has recaptured its story to the investor community, after a half-year of uncertainty. For instance, instead of first-quarter earnings being colored by uncertainty surrounding food expense, margins and comparable store sales growth forecasts, the most notable recent announcement by the company may have been its introduction of Patron Tequila to margarita's made in the company's stores. Such moves highlight how Chipotle may have easy levers to pull to drive in increasing revenue from its consistently growing number of stores. While margaritas account for only about 1% of Chipotle's revenue, the company told BusinessWeek it expects a higher figure going forward given the appeal of Patron. Better tasting tequilas may build excitement about Chipotle for the company's loyal customers, and it may underscore to investors that the Denver-based restaurant chain is a premium brand in some key demographics. When outlining a short position in Chipotle shares, David Einhorn said a survey conducted by Greenlight Capital showed the company's customers were vulnerable to switching to Taco Bell, owned by Yum! Brands (YUM - Get Report). A recent brand score survey by Goldman Sachs supported some of Einhorn's assertions.