Chipotle's Lost Sales Could Be Permanent; Raymond James Downgrades To Underperform

Raymond James’ Brian M. Vaccaro believes that the lost sales being witnessed by Chipotle Mexican Grill, Inc. CMG could be more permanent in nature and could drive additional downside risk for the stock.

Vaccaro downgraded the rating on the company from Market Perform to Underperform.

“New Normal” For Sales?

The analyst mentioned that sales were still down 15-20 percent after nearly 12 months of the initial E.coli incident.

“We suspect the remaining sales decline reflects a more permanent change in frequency/loyalty among some consumers (from unusually high levels prior to the incident) rather than elevated food safety concerns,” Vaccaro stated.

Related Link: One Analyst Continues To Believe Chipotle's Valuation Is Overly Optimistic

The analyst believes that if this is the “new normal” for Chipotle’s sales, the company’s financial model would still remain among the strongest in Raymond James’ coverage universe.

However, the risk/reward from the current valuation levels appears more skewed to the negative.

Q3 Expectations

Chipotle is scheduled to report its Q3 2016 results after market close on October 25. Vaccaro expects the company to report its EPS at $1.65, below the consensus forecast, and reflecting a comp decline of 18 percent.

“Our model assumes total revenue declines ~11 percent y/y to $1.09 billion and that store level margins decline nearly 1,000 bp on sales deleverage and elevated advertising/promo costs,” the analyst said.

The 2016 EPS estimate has been lowered to reflect more conservative comp and margin expectations for H2.