Chipotle Mexican Grill has fallen 4.4% since I last wrote negatively on the name on April 6th ( 'Chipotle Stock Going to Puke' ). Although the stock is down, it certainly did not fall as much as I thought it would have - I expected it to be trading around $400 coming into it's First Quarter earnings report. There continues to be analysts and investors who think the company has seen the worst of the fallout from the E.coli breakouts and growth will return in the second half of 2016. Despite biased surveys citing improved customer sentiment, and reports that stores are seeing traffic returning, I am still a skeptic on the turnaround, and think 2016 will mostly be a washout for the company. The company has changed it's philosophy to spend at all costs to regain the customer and it is not something that can be changed back very quickly, because of that, the issue with earnings will linger into at least Quarter Three.
I have outlined most of my Bear case in previous articles, so I am not going to restate them here. But with the company slated to report after the market closes on Tuesday, April 26th, I do have some expectations for the report:
- They will report a loss of greater than the $1 guidance given in their most recent update. My guess would be around a loss of $2 per share.
- Same store sales will be down over 30% with revenue coming it at $780 million(includes the extra day for leap year)
- Company will announce flat Q2 EPS guidance and not issue any other guidance due to limited visibility
- The company will be down to $600 million in cash, a $629 million decrease from Quarter Four
If any of the above happen, the stock will trade down to the $415-$420 level.
With the options pricing in a large move, I will not be adding puts into the report, as I feel the risk vs. reward setup for downside is limited.
For example, the $415 puts for next week are trading at $7.55. In order to be flat on the trade on Wednesday morning, the stock would need to fall to around $409. To start making money, the stock would need to fall below the $407.50 area. If you are looking for big gains on the options, which is how I trade, the stock would need sell off over 13% and break under $39 .
The calls look a little better for a trade if you think the company is going to give a rosy outlook and update. With most of the bad news priced in, any upside update would likely trigger a multi-day move over $500, where some of the strikes over $510 may offer a nice risk vs. reward.
Both scenarios are more skewed towards trying to enter on Wednesday morning. Here is a quick snapshot on the earnings setup for the stock:
Will have an update Wednesday morning on how I plan to trade the stock after the report.