Updated to include comments from company's earnings call on Oct. 20.
On Tuesday, the better burrito giant, known for routinely trouncing Wall Street's profit estimates, reported earnings of $4.59 a share, falling shy of Wall Street's forecast of $4.62 a share. Same-restaurant sales rose 2.6% for the third quarter, relatively in line with estimates calling for a 2.5% increase. The sales performance marked a considerable slowdown from a 19.8% gain delivered a year earlier.
Where Chipotle really got tripped up during the quarter, though, was on higher labor and marketing costs just as sales growth cooled, which led to a 50 basis point year-over-year decline in profit margins. In the previous quarter, profit margins had increased by 70 basis points compared to the year ago quarter, aided by a stronger 4.3% same-store sales increase.
As TheStreet reported on Monday, Chipotle believes it needs a mid-single-digit same-store sales increase to continue holding its labor costs steady as a percentage of sales. An increase of less than that would lead to what executives refer to as "de-levering," a catchphrase that essentially means profits are being eroded due to high costs.
That is exactly what transpired during the third quarter. Chipotle didn't help its case much that de-levering was poised to subside on a call with analysts. The company admitted that sales in October have been "very, very choppy" and cooled in August and September following a burrito giveaway promotion in July. Furthermore, Chipotle forecast a low-single digit same-store sales gain for 2016, which would represent a more moderate rate of growth compared to 2015.
Investors sent shares down about 7.5% in after-hours trading Tuesday.