NEW YORK (AP) — Shares of Chipotle Mexican Grill plunged 21 percent after its second-quarter sales and fears of rising food costs led to analyst downgrades on Wall Street.
THE SPARK: The Denver company said late Thursday that its revenue in the second quarter rose by 21 percent. Although that would be an impressive showing for most other restaurant chains, it fell short of analyst estimates for Chipotle.
Revenue from Chipotle's fast-casual restaurants open at least a year increased 8 percent from the year-ago period, but that also fell short of some projections. That's a key metric because it strips out the volatility of recently opened or closed stores.
Investors are also worried that the company will face rising food costs next year as a result of the severe drought in the Midwest, which has pushed corn prices to record levels. As of Sunday, the U.S. Agriculture Department said that the merciless summer heat had left nearly 40 percent of the corn crop in poor-to-very-poor conditions. That's compared with just 11 percent a year ago.
THE BIG PICTURE: Chipotle Mexican Grill has been a favorite among diners and investors, and its stock price has grown more than four-fold in the past five years. But some have begun to wonder if a burrito bubble has been building in its stock. Shares hit an all-time high of about $440 per share in April and the numbers released this week appeared to confirm suspicions that investors had become too optimistic.
Chipotle's net income soared more than 61 percent in the second quarter and total revenue rose to $690.9 million. But analysts polled by FactSet expected revenue of $704.8 million.
In a conference call with investors after the earnings release, Chief Financial Officer John Hartung attributed the slower growth to the broader economic uncertainty and a pullback in consumer spending. He also noted that the company was up against a tough comparison, as revenue at restaurants open at least a year had grown 18.7 percent in the year-ago period.
THE ANALYSIS: Analyst Michael Kelter of Goldman Sachs removed the company from the conviction buy list and downgraded the stock to "Neutral" from "Buy." He said moderating traffic and slower sales for new restaurants are "early warning signs." Kelter lowered his price target to $365 from $475.
Janney Capital Markets and Deutsche Bank also downgraded the company from "Buy" to "Neutral."
Cowen and Co. analyst Paul Westra said the sales numbers signal a rapid narrowing of Chipotle's growth in recent years and suggest the brand is approaching its "middle age." He expects 2012 will be a transition year toward more normalized sales growth.
Raymond James analyst Bryan Elliot, who affirmed his "Underperform" rating on the stock, noted that the big boost in net income was driven by a sharp drop in marketing costs and lower-than-expected food costs, which resulted in the highest-ever restaurant-level margins for the quarter. But he also noted that food costs are only expected to rise through next year.
Sara Senatore, a Bernstein analyst, said she thinks Chipotle still has room for growth and noted that the disappointing results were partly the result of larger factors. She affirmed her "Outperform" rating.
SHARE ACTION: Chipotle's stock slid $86.12 to $317.74 in afternoon trading. The company says it's on track to open up to 165 new restaurants this year, after opening 87 so far for a total of about 1,316.
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