Chipotle's stock suffers biggest loss of the year after sales warning – MarketWatch

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Shares of Chipotle Mexican Grill Inc. tumbled Tuesday to suffer the biggest one-day selloff so far this year, as a sales and margin warning prompted some Wall Street analysts to cut their price targets.

The fast-casual Mexican food chain disclosed in a statement filed late Monday with the Securities and Exchange Commission, which followed the company’s investor day, that 2017 comparable-restaurant sales would rise in the “high-single-digits” percentage range over 2016 levels. That was below the average analyst estimate as compiled by FactSet of 10.1% growth.

The company also stated it expects second-quarter marketing and promotion costs to be up 0.20 to 0.30 percentage points from the first quarter. As a result, Chipotle said it expects operating costs as a percentage of sales to be “at or slightly higher” than the first quarter, which suggests pressure on profit margins.

Chipotle’s stock CMG, -7.26%  dropped 7.3% in active trade to close at the lowest level since March 27. It suffered the biggest one-day percentage decline since it plunted 7.6% on Dec. 6, 2016. Volume spiked to 3.3 million shares, which was nearly five times the full-day average.

Analyst Mark Kalinowski at Instinet cut his stock price target to $480, which was still 12% above current levels, from $510, while slashing his 2017 earnings-per-share estimate to $8.30 from $8.75, citing management’s new margin guidance.

The 2018 EPS estimate was cut to $12.00 from $12.75, “given the lower base of earnings from 2017 and our expectation that continued investments will be required to drive the desired [sales] trajectory,” Kalinowski wrote in a note to clients.

SunTrust Robinson Humprey analyst Jake Bartlett cut his stock price target to $530 from $550, as he said he believes the company’s margin guidance implies weaker-than-expected same-store sales for the current quarter, as well.

Bartlett dropped his second-quarter 2017 same-store sales estimate to 9.0% growth from 12.0%, his 2Q17 restaurant margin projection to 18.7% from 21.3% and his 2017 same-store sales outlook to a 10.5% rise from 11.5%.

“While 2Q17 same-store sales were not mentioned in the filing, in our view, margin guidance suggests weaker-than-expected 2Q same-store sales, in part due to May weather,” Bartlett wrote in a note to clients.

The company isn’t scheduled to report second-quarter results until July 20, with the FactSet consensus for EPS currently at $2.30, for revenue at $1.19 billion, and for same-store sales at 10.0%. Chipotle snapped a seven-quarter streak of declining same-store sales, when it reported in April first-quarter growth of 17.8%, beating expectations of a 14.9% rise.

The prior weakness in sales resulted from a public-relations crisis after some customers were sickened by E.coli and norovirus outbreaks.

The crisis appeared to pass for investors, as the stock rallied to a 14-month high of $496.14 on May 16. Since then, however, the stock has tumbled 14%, which puts it firmly into “correction” territory. It would enter a bear market–a decline of at least 20% from a bull-market peak–if it closes at or below $396.91. But Raymond James analyst Brian Vaccaro still thinks it is too pricey.

Vaccaro reiterated his underperform rating on the stock — he didn’t have a stock-price target — as his analysis suggests current valuations based on earnings per share are above the top end of historical valuation ranges. He wrote in a research note that “the stock at current levels reflects overly aggressive bull case [same-store sales] and margin expectations,” and believes a deceleration in same-store sales to below 5% growth in the fourth quarter is possible.

Chipotle’s stock was still up 12.8% year to date, while the SPDR Consumer Discretionary Select Sector exchange-traded fund XLY, -1.25%  has climbed 10.2% and the S&P 500 index SPX, -0.67%  has gained 8.9%.

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