(Bloomberg) — A hubbub on social media over Chipotle Mexican Grill Inc.’s portion sizes has sent the burrito chain’s shares into their worst tailspin in nearly a year.
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For Wall Street bulls, the rout that has wiped out roughly $7 billion in market value this week presents a buying opportunity. They argue that the backlash won’t last long enough to justify the extent of the selloff, even as consumers continue to scrutinize price increases and perceived ‘shrinkflation’ at dining establishments.
“Clearly, consumers are disgruntled by the value proposition across the industry and are pushing back,” BTIG analyst Peter Saleh wrote in a note to clients. “Any pullback in shares on this dynamic will be short-lived and represents a buying opportunity.”
The stock plunged 8.1% in the past five days and is now down 16% from a record set last month. Chipotle’s 50-for-1 stock split in late June added to volatility in recent weeks.
Saleh said that Chipotle is just the latest restaurant chain to face criticism on social media. He noted that Starbucks Corp. has faced backlash over its perceived stance on the Israel-Hamas war, which the company has sought to counter. And, in a case more similar to Chipotle’s, consumers took to social media to complain about price increases at McDonald’s Corp. earlier this year.
Chipotle’s criticism online comes from diners who say its serving sizes have shrunk, though Chief Executive Officer Brian Niccol has denied the claims. The complaints got some validity from a Wells Fargo note in late June that said its analysts’ research found that Chipotle’s portions varied widely.
Eric Clark, a portfolio manager at Accuvest Global Advisors, said he would be a buyer of recent weakness, touting the company’s appeal to a younger demographic with more discretionary income, its higher quality of food and potential to open more locations. He already owns the stock.
“Chipotle is an expensive stock and it’s always been, but it has great growth characteristics,” he said.
At Stifel, analyst Chris O’Cull said he wouldn’t be surprised if there was some “short-term disruption” from customers’ claims about small portions, but he views any pullbacks related to this concern as a chance to buy Chipotle shares. O’Cull also boosted his comparable sales estimate for the second quarter after mobile location data suggested that Chipotle’s traffic was strong.
Analysts tracked by Bloomberg expect Chipotle’s comparable sales rose about 9% in the second quarter, faster than the year-ago period. They anticipate the chain’s profit jumped 24% in the period, representing a deceleration from the previous year.
An additional watch point came with the announcement this week that long-standing Chief Financial Officer Jack Hartung will retire, and Vice President of Finance Adam Rymer will take over on Jan. 1. Raymond James analyst Brian Vaccaro acknowledged that Rymer “has big shoes to fill,” but he ultimately expects a smooth transition.
To be sure, Chipotle isn’t the only restaurant stock that’s retreated recently. The S&P Composite 1500 Restaurants Index dropped for a third straight week in its longest losing streak since March. The group has come under pressure amid increasing worries about how consumers are holding up given persistent inflation and elevated borrowing costs.
Saleh at BTIG said sentiment for restaurant stocks into second-quarter earnings season is the poorest it’s been since concerns around the impact of appetite-suppressing medications hit the industry late last summer. He called the recent weakness “warranted,” especially for fast-food chains as price wars intensify. Saleh favors restaurants like Domino’s Pizza Inc., which he said has several company-specific sales drivers.
Chipotle, Domino’s and McDonald’s are among restaurant operators expected to report results later this month, with earnings from others including Wendy’s Co. and YUM! Brands Inc. anticipated to follow in August.
–With assistance from Janet Freund.
(Updates share-price moves throughout and chart.)
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