Chipotle Mexican Grill Has a Lot to Prove on Thursday

By Rick Munarriz Markets

Chipotle needs to "guac" and roll this week. Image source: Chipotle.

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There's a lot riding onChipotle Mexican Grill (NYSE: CMG)as it gets ready to report financial results for the fourth quarter on Thursday. The burrito-rolling chain's stock has climbed 11% this month, up 13% since the day after reporting disappointing third-quarter results three months ago.

With so much air whipped into the stock since its last quarterly report, it's easy to see why the stock could make a big move -- up or down -- on Friday following its earnings announcement shortly after Thursday's market close.

Chipotle stock tends to be volatile the day after posting fresh financials. Just check out the market reaction following each of last year's first three quarters.

  • The shares took a 9% hit on Oct. 26 after falling short of market expectations on its turnaround efforts.
  • Chipotle moved 6% higher on July 22 after posting what were then encouraging results for the second quarter.
  • The stock tumbled 6% on April 27 after a rough first quarter.

We're eyeing a move of at least 6% on Chipotle's earnings through 2016. If we go back to the 3% hit it took the day after 2015's fourth quarter and the 6% hit following that year's third quarter, we're also looking at a stock that has moved lower the day after four of its last five earnings reports. The stock's recently buoyant ways and a tendency to slide on earnings seem to be on a collision course, but things don't have to get ugly later this week.

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Glimmers of hope

One thing that ties the past quarterly reports together is that Chipotle wound up posting negative or deteriorating comps. The fourth quarter will be the chain's fifth straight period of declining same-store sales, but Chipotle already announced that comps turned positive in December.

M Science -- the research and analytics firm that was waxing bearish on Chipotle's turnaround prospects three months ago -- chimed in yesterday to report that it sees significant growth improvement through the first three weeks of January.

Breaking back into positive comps won't be enough to push Chipotle higher. Comps plummeted 29.7% during the first quarter of last year. Even if comps climb 10% this quarter, it would still be nearly 23% below where same-store sales were two years ago.

Chipotle stock will also need to beef up its margins if it wants to become a market darling again, something that just hasn't happened as it ramps up its promotional activities and falls victim to the detrimental profit-munching aspects of cascading traffic volume.

The fourth-quarter results won't be pretty on Thursday. Analysts see earnings per share plunging 72% to $0.61 a share. They see 4% in revenue growth, essentially the handiwork of new stores offsetting the nearly 5% slide in comps that Chipotle already pre-announced. Chipotle stock's volatility on Friday will be dictated more about what it sees in the future than the ugly view from the rearview mirror. Chipotle's stock is going to move on Friday, and its outlook for 2017 will be what decides if it's a good day for the bulls or bears.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.