In Q1, Chipotle's Big Beat Not Enough To Budge This Bear

Chipotle Mexican Grill, Inc. (NYSE: CMG)'s earnings and revenue beat in its first-quarter report may have impressed some investors, but at least one Wall Street analyst isn't budging on his bearish stance.

Stephens' Will Slabaugh maintains an Underweight rating on Chipotle's stock with a price target boosted from $325 to $350 even though many of the restaurant's metrics came in better than he expected. Chipotle's adjusted earnings per share of $1.60 came in ahead of the analyst's $1.46 per share estimate while same-store sales of 17.8 percent also beat his 17.0 percent estimate.

However, Slabaugh stated that Chipotle's strong acceleration was "widely expected" and may have seen easier year-over-year comparisons (for example same-store sales fell 28.7 percent in Q1 of 2016) as the quarter lapped the food safety scare.

Not Good Enough

Slabaugh further noted that Chipotle's initiatives in digital ordering and catering could make up a "much larger piece" of the company's business over time, but the analyst is concerned over a lack of improvement in two-year sales trends, which also raises traffic questions.

Slabaugh is also concerned around new unit AUVs (average unit volume) and that investor expectations are calling for a recovery in AUVs faster than expected. While this is a legitimate concern, the analyst did note that new stores are being opened in stronger markets, which modestly improves returns.

Finally, Slabaugh acknowledged it is "reassuring" Chipotle showed margin improvements on sales leveraging and cost controls; the unfortunate reality may be those incremental improvements to achieve a low-to-mid 20s restaurant level margins (versus peak margins at 28 percent).

Of particular note, the analyst didn't reference Chipotle's unauthorized payment activity.

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Image Credit: By Guillaume Capron from Issy les Moulineaux, France [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons