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Wall Street Underestimated the Costs to Clean Up Chipotle’s Mess

Ralph Nathan

Chipotle in February: The Cost of Cleaning Up the Mess

(Continued from Prior Part)

1Q16 expected EPS

Chipotle Mexican Grill (CMG) expects its 1Q16 EPS (earnings per share) to be -$1 against analysts’ expectations of $0.11. That’s a decline of 125.8% from $3.90 in 1Q15. Analysts are expecting 1Q16 EPS of Chipotle’s peers Panera Bread (PNRA), Shake Shack (SHAK), and Noodle’s & Co. (NDLS) to grow by 5.6%, 115.2%, and -300%, respectively, year-over-year.

Increase in expenses

Chipotle expects its operating margins for 1Q16 to decline to mid-single digits compared to 18.2% in 1Q15. The decline was due to an increase in food and packaging costs. These costs were due to an increase in additional food safety protocols, higher rejection rate due to high-resolution DNA testing, and lower sales volumes. Labor costs have also increased, as the company wanted to ensure full staff for smooth functioning when customers redeemed their free burrito offers.

The company added that its marketing and promotional expenses were higher and will continue to be high in 2Q16 as well. The legal expenses associated with the United States Department of Justice also contributed to the decline in Chipotle’s profit margins. This decline and the decline in sales have led to a decline in 1Q16 expected EPS.

If you want to avoid the risks of Chipotle-specific health issues, you can invest in the Consumer Discretionary Select Sector SPDR ETF (XLY). The fund has 11.1% of its holdings in restaurant companies such as McDonald’s (MCD), Starbucks (SBUX), and YUM! Brands (YUM). You can also invest in the Guggenheim S&P 500 Pure Growth ETF (RPG), which has 44% of its holdings in restaurants and travel.

In the next part, we’ll compare Chipotle’s performance to its peers.

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