Investors in beleaguered burrito business Chipotle Mexican Grill (CMG) celebrated Tuesday as the company announced promising, preliminary results for the fourth quarter.
However, it is not time to start heralding a comeback. Chipotle still faces deep-rooted problems 16 months after food-borne bacteria sickened scores at multiple locations and tainted the brand. Investors should avoid the stock.
For the quarter, Chipotle recorded a 4.8% drop in same-store sales.
To be sure, this is not the disaster that it would be at other companies. Moreover, sales have been on an upward trend over the past three months.
For October, same-store sales plummeted by 20%. In November, comparable sales fell by only 1.4%, and in December they increased by 14.7%. Chipotle shares rose 4.64% to $414.48 in Tuesday trading.
Still, Chipotle's sales came in lower than Wall Street's expectations. During the fourth quarter, Chipotle expects to have registered $1.04 billion in sales, versus $997.5 million in the year-ago period. Analysts had forecast sales of $1.05 billion for the quarter. The company expects earnings per share in the range of 50 cents a share to 58 cents a share, below Wall Street's consensus estimate of 96 cents.
Chipotle's expenses also came in higher than expected. The company has been doubling down on its efforts to attract repeat customers through aggressive marketing and generous promotional offers. However, that has come with a hefty price tag.
So, apparently, do avocados. Chipotle reported that the cost for the fruit that it uses in its guacamole has risen, driving up costs. The company expects restaurant-level operating margin for the quarter at 13% to 14%.
Moreover, since the fall of 2015, Chipotle's stock has lost more than half its value. Concerns about the company's food safety following an outbreak remain. Heavy marketing campaigns haven't lured back enough customers.
Also, it's a risky time to be investing in restaurants. We're currently in what some analysts are expecting to be a drawn-out "restaurant recession" that is affecting not only troubled Chipotle but healthy chains such as Panera Bread (PNRA) .
Panera Bread is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stock here. Want to be alerted before Cramer buys or sells PNRA? Learn more now.
Investors should continue to be wary of Chipotle's stock, even if it looks as if the company's health is improving.
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