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Higher Advertising And Food Costs Will Doom Chipotle’s Q4 Earnings

Tuesday, January 10, 2017 6:25
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From Embattled burrito chain Chipotle Mexican Grill, Inc. (NYSE:CMG) early Tuesday pre-announced its fourth quarter earnings numbers, and the results were not pretty.

The Denver-based company released preliminary Q4 EPS results ranging from just $0.50 to $0.58, which is a far cry from the $0.98 that Wall Street was expecting. Chipotle also sees Q4 revenues of $1.035 billion, which is up slightly from last year’s $1.01 billion, but below the consensus analyst estimate of $1.05 billion.

CMG’s comparable sales numbers weren’t much better. The company said that Q4 comps will likely fall -4.8% from last year, in a sign that established stores continue to languish amid higher competition and fallout from a tainted food scandal. Comparable sales, also known as same-store sales, are perhaps the most important measure of a restaurant chain’s health, since they only look at year-over-year sales trends from stores open at least twelve months.

Analysts were looking for comparable sales declines in the -3.5% range for Q4.

Chipotle also expects operating margins for the fourth quarter to be somewhere between 13% and 14%. The company commented via press release:

“During the quarter we incurred higher expenses compared to our originally-forecasted amounts in other operating costs, driven by increased promotional spend and costs related to testing television advertising. Our marketing and promotional expenses during the quarter totaled ~4.7% of sales. We also incurred higher food costs compared to our originally-forecasted amounts as a result of increased market costs for avocados.”

The silver lining of the announcement, if there is one, is CMG’s slight bump to its current $2.1 billion share buyback program. The company now plans an additional $100 million worth of stock repurchases.

Chipotle Mexican Grill, Inc. shares was unchanged in premarket trading Tuesday. Year-to-date, CMG has gained 4.70%, versus a 1.31% rise in the benchmark S&P 500 index during the same period.

CMG currently has an POWR Rating of C (Neutral), and is ranked #32 of 54 stocks in the Restaurants category.

ETF investors will want to keep an eye on the Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF today, which has the largest exposure to CMG out of all ETFs at 0.96% of its total holdings.

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