Holy Guacamole! Chipotle Tumbles

Evan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shares of the Mexican restaurant Chipotle (NYSE: CMG) lost 21% of their value last Friday as concerns that their white-hot ascension to restaurant supremacy is spoiling on them.  The chain’s underwhelming quarterly results and warnings of diminished growth roiled investors, casting a dimmed perception on how other restaurants will fare in the current economic climate.

Wall Street as a whole took a big hit on Friday over resurfacing worries about the European debt crisis, erasing three days of gains.  This has overshadowed some encouraging news about another round of strong corporate profits.  Wall Street’s losses make one thing certain:  the European debt crisis can rear its ugly head any time, and it certainly isn’t anywhere near being over.

Other companies, including Starbucks (NASDAQ: SBUX), Panera Bread (NASDAQ: PNRA), and the organic retailer Whole Foods Market (NASDAQ: WFM), also had significant chunks of stock value eaten away.

Starbucks stock dropped after the company announced the buyout of the La Boulange bakery chain for $100 million.  Shareholders were not too keen on Starbucks taking the gamble with La Boulange as it will most likely take a lot of money and shrink earnings, but in the end the buy might actually be very profitable for Starbucks.

Panera Bread shares were recently downgraded from a healthy "overweight" rating to an "underweight" rating by analysts at the financial firm Piper Jaffray. The stock is being pounded pretty hard on Wall Street, with investors betting on more downside for Panera in the short term.  The company's stock fell after Chipotle's disappointing second-quarter earnings report, and this might have caused traders some unease ahead of Panera's own earnings report, coming out on July 25.

Along with the rest of the foods industry, Whole Foods Market is dealing with rising food costs as well.  Fears that its customers might move away from its healthier, yet more expensive, food products are starting to surface.  Stagnating economic recovery and non-encouraging job growth numbers are important issues on the minds of Whole Foods shareholders, and it certainly isn't helping.

Chipotle was Friday's biggest decliner on the S&P 500 Consumer Discretionary Index, but does remain up over 12 percent year-to-date.

Consumer spending was robust during the first quarter of 2012, when mild winter weather drew people to go shopping and out dining. This helped prompt companies to add jobs earlier than usual.

However, stagnant job growth and lower consumer spending has helped fuel poor economic outlooks and drive down stocks in general. Extreme weather will increase food costs later this year and next year, further hurting the restaurant industry.

So, is it time to start “eating home” on restaurant stocks? Not necessarily. It’s too soon to know if Chipotle’s disappointing growth signals an industry-wide problem, but then again, a rough time for Chipotle may point to a bad time for all. Dismal droughts, which drive up food prices, will certainly not help the situation.

Still, Chipotle, Starbucks, Whole Foods, and Panera Bread are all doing very well overall for the year. Chipotle specifically has far outpaced the S&P 500 this year, rising 19.5%. The company’s second quarter revenue, while it was short of analysts’ forecasts, was still pretty good - Chipotle raked in $691 million last quarter, as opposed to the expected $706.7 million.

The possible upside is that fewer spending dollars for more expensive restaurants might signal a simple shift of revenues to the less expensive places to eat.  Also, the one-day large drop might be just that: a one-day large drop. In general, the restaurant industry is still relatively strong, and there is no need to panic just yet.

Chipotle can recover from “investor jitters” by keeping its quality services and products top of the line and finding areas to possibly trim down. By continuing to tell, show, and make consumers believe that that they are the best burrito builders, the consumers will keep paying the bucks for what Chipotle makes. Chipotle has to keep an eye on how the market and the economy are doing as a whole before possibly trimming down on their services. Cutting back on services and products, though, would likely be seen as a decrease in Chipotle’s quality, something that Chipotle wants to avoid like the plague.

Bottom line: will this drop signal more things to come? Maybe. But Chipotle can recover and make investors shout, “Holy Guacamole!” once again.

 


EvanBuck has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, Panera Bread, Starbucks, and Whole Foods Market. Motley Fool newsletter services recommend Chipotle Mexican Grill, Panera Bread, Starbucks, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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