Wedbush Turns Bearish On Chipotle, Says Risks Are Underappreciated

Chipotle Mexican Grill, Inc. CMG CEO Brian Niccol has made his turnaround plan clear to the investment community, but Wedbush isn't optimistic on the outlook due to what it said are underappreciated risks.

The Analyst

Wedbush's Nick Setyan downgraded Chipotle Mexican Grill from Neutral to Underperform with a price target lowered from $450 to $445.

The Thesis

Niccol communicated a longer-term strategy, but Chipotle's immediate trends should be concerning to investors, Setyan said in the downgrade note. (See the analyst's track record here.) 

Wedbush's proprietary checks suggest third-quarter same-store sales growth is trending below the 5.7-percent consensus estimate, the analyst said.

The restaurant chain's August trends are of particular concern given an easier comparison ahead of last September's queso launch and a likely slowdown due to a foodborne illness outbreak in Ohio. 

The Street's same-store sales growth estimate of 4.2 percent for fiscal 2019 is "not unreasonable," but multiple underappreciated risks need to be considered, Setyan said. These include a declining contribution from menu price increases and a more favorable sales mix, and the timeline for new product innovation could be pushed back further than is expected, he said. 

Niccol's compensation and bonus package is tied to achieving multiple financial targets in 2020, including $20 in EPS, a same-store sales growth rate of more than 6.5 percent and a restaurant-level margin of more than 21 percent, the analyst said.

The targets are not "as meaningful of an incentive as some bullish investors may believe," as the executive will be well-compensated even if 2020 numbers end up coming in light, according to Wedbush. 

Price Action

Chipotle Mexican Grill were trading lower 2.62 percent at $507 at the time of publication Monday. 

Related Links:

Chipotle Has A New Game Plan: Is Wall Street On Board?

Morgan Stanley Turns Bullish On Chipotle, Says Earnings Recovery Is Real

Photo courtesy of Chipotle.