Why Chipotle Stock Tumbled Today

By Markets Fool.com

Image source: Chipotle.

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What happened

Shares of embattled fast-casual chain Chipotle (NYSE: CMG)slumped on Wednesday following a third-quarter report that failed to show signs of a turnaround. The company missed analyst estimates badly, reporting a steeper-than-expected decline in comparable sales. At 3 p.m. EDT, the stock was down about 10%.

So what

Chipotle reported third-quarter revenue of $1.04 billion, down 14.8% year over year and $50 million below the average analyst estimate. Comparable restaurant sales dropped 21.9%, with September marking the 11th consecutive month of decline. Comparable transactions fell by a smaller 15.2%, with the discrepancy driven in part by the various initiatives Chipotle has launched following last year's food safety crisis.

Chipotle's earnings fell off a cliff during the third quarter. The company reported EPS of $0.27, down from $4.59 in the prior-year period. Analysts were expecting EPS of $1.59. Restaurant level operating margin was cut in half to 14.1%, driven by lower sales and higher costs. Despite the steep drop in revenue, total operating expenses increased by 4.6% year over year.

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Layered on top of Chipotle's lackluster results was the announcement that ShopHouse, the company's Asian concept chain, was being abandoned. Chipotle will now focus on two other concepts, taking an impairment charge in the third-quarter related to the chain.

Now what

Chipotle's management is optimistic that a comeback is in the cards next year. Guidance for 2017 calls for comparable sales growth in the high single-digits, a restaurant level operating margin of 20%, and EPS of $10. Because Chipotle's sales have fallen so far, a sharp rebound isn't out of the question. But investors appear to have little confidence in management's outlook, given the drop in the stock price following earnings.

"Our restaurant teams are very excited to see more customers return to their restaurants, and are working hard to reward them with an excellent guest experience," said co-CEO Monty Moran. "After successfully implementing an industry leading food safety program, and as our marketing efforts are driving more people to our restaurants, it is critical that we are prepared to delight customers on every visit. We are confident that we have the leadership and teams in place to do just that."

Chipotle expects a low single-digit decline in comparable sales during the fourth quarter. If the company comes up short of that goal, watch out below.

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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.