Market News Call

News recap: Chipotle Mexican Grill, Inc. (NYSE:CMG), Yahoo! Inc.(NASDAQ:YHOO)

Shares of Chipotle Mexican Grill, Inc.(NYSE:CMG) are down 5% in pre-market action following the company’s fourth quarter earnings report, which was better than expected but not good.

The press release starts off with fourth quarter “highlights,” yet it read more like a series of lowlights.  Revenue decreased 6.8% versus the year-ago period to $997.5 million, comparable restaurant sales decreased 14.6%, restaurant level operating margin dropped 700 basis points to 19.6%, and diluted earnings per share plummeted 43.5% to $2.17.

Chipotle’s diluted earnings per share were actually well ahead of analysts’ average expectation, which had been keyed off the company’s guidance last month that they would be in the range of $1.70 to $1.90.   Chipotle said its better-than-expected result was driven primarily by a lower non-cash stock-based compensation expense related to the vesting of performance shares.

Should Investors Buy CMG After The Recent Development? Find Out Here

The company and its stock have been battered by a well-publicized E. Coli problem at a number of its restaurants, which resulted in the fourth quarter of 2015 being the most challenging period in the company’s history, according to founder, chairman, and co-CEO Steve Ells.

That E. Coli incident has passed, according to the Centers for Disease Control and Prevention, yet it is heating up in a new way in the legal arena.

In conjunction with its earnings release, Chipotle acknowledged that it received a new subpoena on January 28 that requires it to produce background on company-wide food safety matters going back to January 1, 2013, versus a prior subpoena that covered only a single restaurant in California.  This is part of the U.S. Attorney’s office for the Central District of California’s criminal investigation that was previously announced.

Chipotle has been investing heavily in efforts to improve food safety at its restaurants and to win back disillusioned customers.  As seen above, profit margins have been hit sharply as a result of those efforts.

It doesn’t sound either as if things are expected to get much better soon.  Chipotle conceded that 2016 will be “…a very difficult year relative to our past performance.”  For the full-year 2015, Chipotle’s revenue increased 9.6% to $4.5 billion, restaurant level operating margin fell 110 basis points to 26.1%, and diluted earnings per share rose 7% to $15.10.

Yahoo! Inc.(NASDAQ:YHOO): FBR Capital notes a light outlook, incorporating slower growth in MaVeNS, YHOO’s key growth driver, overshadowed a 4Q beat. While in most circumstances, an announcement that a company is exploring strategic alternatives would be met with a bullish stock reaction, in YHOO’s case, the stock reaction is likely to be subverted by the statement that the board is fully committed to the turnaround efforts of the management team. Reducing tgt to $37 from $44.

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