This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why I Can't Stomach Chipotle's Weak Comps

Meanwhile, profitability wasn't any better. Restaurant level operating margin was 26.3% falling 110 basis points year over year. Here again, the company shows increased signs of struggle from higher food costs. This is the second consecutive quarter of margin erosion after the company shed 150 basis points in the fourth quarter.

I've made this point once before: Food costs took 33% of Chipotle's revenue is a cause for indigestion. As long as food costs remain at such a high percentage of revenue, this will continue to add pressure on management to raise menu prices. The good news here is that the 33% in this quarter is 50 basis points lower than what Chipotle reported in the fourth quarter, which led to a 16.5% jump in operating income.

How Well Is the Strategy Growth Working?

This is the million-dollar question. Management believes in its aggressive growth objectives. That's all well and good. But at some point this business will need to slow its expansion strategy and focus on current operations. The company plans to open 165 to 180 new restaurants this year. Meanwhile, there are no signs that food costs are going to stop rising.

To that end, McDonald's, which once seemed impervious to such macro matters has recently decided to remove its Angus third-pounder from its menu by the middle of next month. In other words, McDonald's is seeing no cost-benefit to keep selling the burgers while the costs of beef continue to rise. Plus, given the fact that Chipotle's menu items were already selling at a premium to McDonald's menu, how will Chipotle respond?

Can management justify raising prices while at the same time risking an already dire comps situation? I don't believe the company has a choice. If it still plans to open the number of stores, these costs will need to be offset somehow. And given the unpredictable nature regarding food costs, this (at least) is one area of its execution it can control. The unknown here, is how customers will respond.

Bottom Line

If management can figure out a way to reverse the decline in comps and margins, then I'd reconsider my bearishness. But in the meantime, I'm going to continue to enjoy Chipotle's food, which is delicious, by the way! The stock, however, is anything but digestible at this level.

At the time of publication, the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
CMG $626.44 0.00%
MCD $98.99 0.00%
YUM $91.54 0.00%
AAPL $132.54 0.00%
FB $80.54 0.00%

Markets

DOW 18,232.02 -53.72 -0.29%
S&P 500 2,126.06 -4.76 -0.22%
NASDAQ 5,089.3620 -1.4320 -0.03%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs