Chipotle's (CMG) Earnings to Trough This Year - RBC

RBC Capital Analyst, David Palmer, reduced 2016 and 2017 EPS estimates on Chipotle Mexican Grill (NYSE: CMG) from $13.41 and $18.66 to $12.85 (-13% YOY) and $17.21 (+34 YOY) to reflect supply chain costs, which are expected to unfavorably impact gross margins by 100–200bps on an ongoing basis. EPS for Q4 goes from $2.01 to $1.81 to account for an incremental $8M ($14–16M total; $0.15 EPS impact) in non-recurring expenses associated with food waste, lab analysis, marketing, and advisory services, which are mostly accounted for at the restaurant level. These estimates imply that Chipotle's ongoing sales declines, food safety investments, and traffic initiatives will result in trough earnings this year.

An "all clear" signal from the CDC will at least provide closure and enable Chipotle to approach its core customer with remorse and transparency. It remains unclear exactly when the CDC will close its E. Coli investigation, but management seemed confident enough to commit to an early- to mid-February media blitz set to include direct mail (coupons), PR communications, and short films.

Chipotle's scores on certain brand attributes are back to pre-crisis levels leading the analyst to believe that margins can begin to recover in 2017, particularly if steak costs begin to decline. Chipotle's restaurant-level economics remain best-in-class despite recent brand damage. Additionally, digital ordering is a significant future opportunity and the company seems to be testing ways to revamp its second make line.

No change to the Outperform rating or $550 price target, which equates to 32x the new 2017 EPS estimate. This represents a discount to the company's 4-year average NTM P/E ratio of 36x and reflects limited earnings visibility going forward.

For an analyst ratings summary and ratings history on Chipotle Mexican Grill click here. For more ratings news on Chipotle Mexican Grill click here.

Shares of Chipotle Mexican Grill closed at $454.30 yesterday.

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