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Chipotle Stock Down on Criminal Investigation News: Here's What's Happening

Jason Hall, The Motley Fool

What happened

Shares of Chipotle Mexican Grill (NYSE: CMG) are down 5% at 3:20 p.m. EDT on April 25, following a disclosure in the company's 10-Q filing before market open today. In the release, Chipotle disclosed that:

On April 18, 2019, we received a new subpoena requesting information related to illness incidents associated with the specific restaurants in Simi Valley, California, Boston, Massachusetts, Sterling, Virginia, and Los Angeles, California that were covered under the previous subpoenas, plus one additional restaurant in Powell, Ohio.

This disclosure is likely playing a big role in the sell-off, particularly considering Chipotle's very strong quarter, which included a massive 10% increase in comps (same-restaurant sales) -- a measure of sales at locations open more than one year. The company said transactions -- a proxy for traffic -- increased 5.8% in the quarter, on the back of expanded ordering options including delivery from many of its restaurants.

Hand of a Chipotle employee preparing a customer's order

Image source: Chipotle.

So what

Management said on the earnings call that the big boost in sales really paid off on the bottom line. Digital sales doubled in the quarter, helping boost operating margin to 21% at the restaurant level, and pushing earnings to $3.13 per share, 47% higher year over year. This marked the fifth consecutive quarter of comps growth, and was easily the company's biggest jump in comps in years.

Management spent a lot of time on the earnings call talking about recent innovations to drive customer traffic higher, which makes sense considering how well those efforts appear to be working. But there wasn't any mention of the recent subpoena on the call.

Now what

Frankly, it wasn't surprising that management didn't bring up the subpoena, nor should it be viewed as an indication of nefarious intent that it was "buried" in the company's quarterly earnings filing. After all, the company just had a blowout quarter, and largely because it's finally starting to get traction with bringing more customers back into its restaurants, after more than a year of relatively stagnant traffic.

Moreover, probably too much is being read into the threat of this recent subpoena. There's been an ongoing investigation into the foodborne-illness incidents Chipotle has experienced going back as far as 2013, and this latest subpoena was only "new" in that it added a request for information related to last year's incident at a Powell, Ohio restaurant which no prior subpoenas had covered.

Don't get me wrong: I'm not saying to dismiss the potential financial risk out of hand. But it's not exactly new, and it doesn't really alter the risk profile.

There's a very good chance that much of today's selling isn't a direct product of the subpoena, but a result of some investors simply looking for a reason to sell. After all, Chipotle stock has more than doubled over the past year, crushing the S&P 500.

In other words, today's sell-off is likely just a lot of profit-taking by investors looking for a reason to pull the trigger. The business continues to execute incredibly well, and as it showed last quarter, it's at the point where its operating model can deliver big profit growth from a relatively modest increase in sales.

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Jason Hall owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.