Chipotle Mexican Grill Q3 Earnings Preview: Where Is The Stock Headed?

Can the Q3 earnings report provide yet another bullish push to CMG stock? Or will even a strong year-over-year (y-o-y) comparison be ignored as the stock has already performed well?

Chipotle Mexican Grill (NYSE:CMG) is scheduled to report its Q3 earnings report for the fiscal 2015 on October 20, 2015. ^[1] The company has fixed most of the headwinds that it faced in the previous two quarters of 2015 fiscal, and as a result the stock has mushroomed up to its all time high once again. Currently trading at $750, the stock has risen roughly 25% over the last 3 months, compared to -3% for the S&P 500.

There are a couple of possible factors that might push the stock price down after the third quarter earnings. Let us discuss them in detail:

We have a $727 price estimate for Chipotle, which is about 3% lower than the current market price.

See Our Complete Analysis For Chipotle Mexican Grill

Tough Y-O-Y Comparison

In Q1 2015, Chipotle reported an impressive 10.4% growth in the comparable store sales, despite all the headwinds created by weather conditions. However, it was not enough to match the 13.4% comparable store sales growth of Q1 2014. To worsen the situation, the company had to suspend one of its pork suppliers in the U.S. after a recent audit, on claims of below standard animal welfare protocols. This affected the supply of Carnitas to about one-third of the company’s outlets. ((Read: Chipotle Mexican Grill earnings: Pork shortage slows down comparable sales growth)) As a result, the company’s stock slumped more than 7% in the first trading hour after the result.

Contrary to this, the company posted merely 4.3% growth in the comparable store sales in Q2 2015, compared to 17.3% growth in Q2 2014. This might have created negative sentiments among the investors, if Chipotle would have not fixed its supplier issue. Soon after the result, the stock touched its all-time high, jumping 8% to $724. ^[2]

This brings us to the third quarter, where Chipotle is facing a tough year-over-year comparison from Q3 2014. Chipotle posted a 20% growth in comparable store sales, with 31.1% year-over-year (y-o-y) increase in the net revenues to $1.08 billion for the quarter. ^[3] It was the highest comparable sales growth in the past 13 quarters for the company. Moreover, the company is expecting low-to-middle single digit comparable store sales growth in Q3.

Moreover, the analysts are estimating the company to post $1.22 billion in revenues, with a growth rate of 13% y-o-y. Furthermore, the EPS figure is estimated to be $4.61 for the quarter, compared to $4.15 in Q3 2014. ^[4] The market estimates indicate a robust growth for the company, and if the company falls short of this estimate, a panic stock selling by the investors could be a possible scenario.

Looking at the investors’ mixed-sentiments this year and the fact that the stock is already at its all-time high, there is a probability that a low sales growth figure might pull the stock down initially.

Pork Supplier Issue Might Slightly Hamper Q3 Results

To counter the pork supplier issue faced by the company in January, Chipotle added a new pork supplier, Karro Food Group of the U.K., which started serving pork to the company’s restaurants in Florida in July. This has brought relief to the company, which was struggling with a shortage of pork to be used in its Carnitas. ^[5]

However, according to the company, the pork supply was restored to as much as 90% of the affected restaurants by the end of September 2015. ^[6] Moreover, the first month of Q3 (July) was without the above mentioned pork supplier and Carnitas were unavailable in most of the stores. The company further mentioned that it is expecting to restore the shortage in all the stores by November end. So the scenario might not only weigh on the comparable sales in Q3, but for a small part in Q4 as well.

Considering the fact that Carnitas is one of the most popular items on Chipotle’s menu, and one of the most expensive items on the list as well, its absence might have surely affected the average check for the company in Q3.

As history suggests, we might perhaps see a lot of movement in the stock both prior and post the earnings results.

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1. Chipotle Mexican Grill, Q3 earnings conference call [↩]
2. Read: Stock touches all-time high, as Chipotle fills in the gaps [↩]
3. Read: Price hikes & increased customer traffic drive Chipotle’s Q3 revenues [↩]
4. Chipotle Mexican Grill, Yahoo Finance, Analysts estimates [↩]
5. Chipotle adds British pork supplier to ease Carnitas shortage [↩]
6. Chipotle’s Carnitas are back in 90% of the restaurants [↩]