Why Shares of The Habit Restaurants Inc. Slumped Today

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What: Shares of The Habit Restaurants sank on Wednesday following the company's first earnings report since its IPO. The stock closed down about 8% on the day after falling as much as 9.6% earlier in the day.

So what: Habit posted impressive results during the fourth quarter. Comparable-restaurant sales rose 13.2% year-over-year, driven by a 5.1% increase in the average transaction size and a 7.7% increase in the number of transactions. Total revenue was $48.4 million, rising 46.7% year-over-year, adjusted for an extra week in 2013. During the fourth quarter, Habit opened 11 restaurants, bringing the total to 109 company-owned locations and one licensed location.

Habit expects revenue for 2015 to be between $216 million and $219 million, calling for comparable-restaurant sales growth of 2.5% to 3%. The company expects to open 26-28 company-owned restaurants in 2015, along with 3-5 franchised locations.

Now what: Habit's high-flying valuation was likely the culprit behind the stock's decline today. Habit now trades at around 5 times sales, with a P/E ratio that's too high to even bother mentioning. This is a Chipotle-level valuation, and Habit will need to continue to rapidly grow both comparable sales and the store count in order to keep it.

Guidance for 2015 called for low single-digit comps, and the company's guidance for store count growth has remained unchanged from previous guidance. It's hard to justify the kind of valuation that Habit is receiving given this outlook, and the stock was punished today for what would have otherwise been a strong quarter and solid guidance.

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The article Why Shares of The Habit Restaurants Inc. Slumped Today originally appeared on Fool.com.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.