Chipotle's Stock Can Go Either Way After Tonight's Earnings

Earnings will show if the fast-food company's turnaround plan worked.
By Chris Laudani ,

Chipotle Mexican Grill (CMG) - Get Report  reports second-quarter earnings today after the close. This is a tricky quarter, and I wouldn't be surprised if the stock had a big move in either direction. The earnings verdict will show whether or not Chipotle's efforts to turn itself around have worked.

Chipotle is still struggling to recover from last year's E. coli breakout. First-quarter same-store sales fell 29.7%. While I expect same-store sales to be better this quarter, they are still likely to be down 20% vs. a 4.3% rise last year. First-quarter transactions were down 21%. Despite the sequential improvement in same-store sales, the company has a long way to go to get back on track.

At the end of April, when CMG reported its first quarter, management said same-store sales slowed the first three weeks of April, which took investors by surprise. Most investors thought same-store sales would recover much faster than they have, and I thought the same. Although the company didn't give any guidance on the first-quarter call, management implied same-store sales could be down 20% to 23%. Right now, the consensus is looking for a drop of 20%.

In an effort to get foot traffic in the door, the company spent much of the first quarter giving out coupons for free burritos. During the quarter, they gave away some six million burritos or burrito bowls. Chipotle has stopped the giveaways and has transitioned to "Buy one, get one free."

The company launched a loyalty program that is effective July 1 through the end of September. Customers pick up a "Chiptopia" card at a Chipotle and earn credits toward food rewards, like a free entree if they have visited often and spent enough.

Chipotle's turnaround hit a snag when one of its senior executives, Mark Crumpacker, the company's chief creative and development officer and the architect of the company's turnaround plan, was arraigned on charges of possession of cocaine. Crumpacker was indicted after an investigation into Manhattan drug trafficking, as we reported at the start of this month.

Crumpacker is on administrative leave, although The Wall Street Journal points out that, as an alleged buyer, he faces a misdemeanor charge.

For the second quarter, analysts are looking for revenue of $1.04 billion, down 12.6%, and earnings per share of $0.91, down 79%. Chipotle plans to open between 220 and 235 new restaurants in 2016.

I expect the stock to trade off same-store sales. If the new promotions work, same-store sales could be better than expected and drive the stock higher. If same-store sales come in as expected, the stock will churn around the current level. If same-store sales are lower than 20%, then the stock will likely correct.

A decent same-store sales number could get the stock up to $450 from the current $416. But right now it seems like it's a flip of a coin.

Editor's Note: This article was originally published at 10 a.m. EDT on Real Money on July 21.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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