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Why I Can't Stomach Chipotle's Weak Comps

NEW YORK (TheStreet) -- When we last discussed Chipotle Mexican Grill (CMG), I asked if growth was still on the menu.

I won't dispute that the company makes the perfect burrito, but the stock has been priced for perfection for some time. But the execution has been anything but flawless.

With rising costs of beef weighing on Chipotle's margins to go along with weakening same-store sales, it's become hard to stomach the stock price, which carries a price-to-earnings ratio twice that of McDonald's (MCD) and almost double the multiple of Yum! Brands (YUM) -- it doesn't make sense. Today, on the heels of the company's first-quarter earnings report, these concerns are even more glaring.


Comps, or another way to say comparable same-store sales, is the metric that tracks the performances of restaurants opened at least one year. Unfortunately for Chipotle, the company has been underperforming in that area, which suggests that these restaurants are seeing a decrease in customer traffic. More than anything, this has been my biggest source of concern with this company.

Chipotle, which at one point traded as high as $419, was doing very well in this metric. The company posted comps of 11.1% two years ago, which was then more than double that of several bigger rivals. Since then, comps have been on a steady decline -- dropping to 8% in the second quarter of 2012, and then falling to 4.8% in the third quarter of last year, which then culminated to comps of 3.8% in the company's fiscal fourth-quarter report in February.


Unfortunately, comps have taken a turn for the worse -- falling to 1% this quarter. Remarkably, Chipotle is being outperformed by Yum! Brands, which recently posted a 2% increase in U.S. comps. The comparison with Yum!'s U.S. business is because Chipotle does not have an international strategy. For Yum!, though, the company still manage to advance comps despite the onslaught of bad publicity that Yum! has had to endure regarding avian and bird flu. So it's hard to cut Chipotle any slack.

First quarter revenue did arrive better than expected, 13% higher year-over-year and 4% higher sequentially. Given the soft patch that McDonald's has experienced, the fact that Chipotle is still posting double-digit percentage growth is no small compliment -- this, I'm willing to admit. But to the extent that a 13% increase in revenue makes up for hemorrhaging comps, I just don't see it that way. Not when the stock's valuation presumes perfection.

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