Chipotle Shares Sputter After Q4 Earnings, but Market Reaction Looks Disproportionately Harsh to Us

Wide-moat Chipotle's fourth-quarter earnings certainly weren't brilliant. The firm's $2.181 billion in sales, 5.6% same-store sales growth, and $8.29 in adjusted EPS missed our estimates of $2.24 billion, 6%, and $8.75, respectively, with FactSet consensus estimates falling within a stone's throw of our own. The firm saw meaningful declines in traffic and mix, fully offset by 13.5% average price increases—which would be sufficient to upset investors' appetites if it weren't for a strong recovery so far in 2023. More concretely, the fourth quarter saw transactions fall 4% from a year ago, driven partially by uninspiring uptake of the firm's limited-time guajillo steak offering, which lapped a tremendously successful beef brisket launch a year ago. Taken in tandem with a margin drag from elevated sick leave (60 basis points) and lower loyalty program breakage estimates (80 basis points), restaurant margins of 24% fell quite a bit behind our 25.4% forecast. On a net basis, the earnings miss leads us to trim our $1,560 fair value estimate by a low-single-digit percentage (2%-3%), with the market's 4%-5% drop after the release striking us as harsh.