Will Chipotle's Q3 Be as Bad as Its Queso?

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We're now a week away from Chipotle Mexican Grill (NYSE: CMG) cracking open the lid on its third-quarter financials, and Wall Street pros continue to scramble away from the thinning bullish camp ahead of the numbers. Three more analysts chimed in on Wednesday, feeling less than enthused about the burrito roller's near-term prospects. 

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Gregory Francort at BofA/Merrill downgraded the stock to underperform, slashing his price target from $390 to $285. He fears that Chipotle's guidance next week could disappoint, and he's concerned that Wall Street's profit targets for next year are being propped up by unrealistic margin projections. He credits Chipotle for doing a good job in managing labor costs in the near term, but he believes it will be challenging to build on that.

Brett Levy at Deutsche Bank is sticking to his earlier sell rating and $250 price target after sizing up the bullish case for the stock. The rollout of queso and easy comps following last year's brutal drop in sales could result in a near-term uptick in sales, but he still feels there are operational, financial, valuation, and even brand issues weighing on its growth prospects for investors.  

We also have Jeffrey Bernstein at Barclays lowering his price target from $370 to $325. He's cautious about next week's quarterly results, expressing concern about challenging fundamentals and visibility. It's never a good sign when so many analysts get cold feet just ahead of a fresh financial report. 

Cheese bawl

This was supposed to be the golden quarter of queso, but reviews have been largely brutal. Along with several analysts that soured on the stock last week -- Wedbush slashed its price target from $350 to $290, and Jefferies checked in with valuation concerns -- it seems as if nobody believes queso will be some magical elixir. 

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Even those who feel that queso is helping nudge sales higher in the nearterm fear what will happen once the novelty is gone. There aren't a lot of people brave enough to show their affinity for Chipotle's all-natural version of queso on social media. 

Not every introduction will be a hit. Chorizo lasted less than two years. The problem here is that high expectations for queso and the subsequent customer backlash could tarnish the already rusting Chipotle brand. Chorizo wasn't popular, but it didn't trigger the kind of public disdain that we're seeing for the chain's first stab at queso. 

Absent a clear catalyst for growth beyond queso, it's easy to see why the market's getting skittish. Chipotle's queso may not be the only thing dipping next week. 

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