Chipotle Falls After Preliminary Earnings Trail Estimates

Chipotle Mexican Grill Inc. (CMG) fell the most in almost three months after reporting preliminary fourth- quarter profit that trailed analysts’ estimates.

The shares dropped 5.5 percent to $280.94 at the close in New York for the biggest decline since Oct. 19. Chipotle declined 12 percent last year, the fifth-worst performance in the Russell 3000 Restaurants Index.

Food costs rose faster than the company expected, signaling the need to raise prices, according to John Glass, an analyst at Morgan Stanley in Boston. The burrito seller is up against increasing competition from rivals including Yum! Brands Inc. (YUM)’s Taco Bell, which is selling a more premium line of food called Cantina Bell.

“Chipotle still has unused pricing power,” Glass wrote today in a note. He rates the shares as equal weight, the equivalent of a hold recommendation.

Profit in the quarter ended Dec. 31 may be $1.92 to $1.97 a share, the Denver-based restaurant chain said yesterday in a statement. Analysts projected $2.09, the average of estimates compiled by Bloomberg.

Raising prices may be hampered by “the difficult external consumer environment,” Andy Barish, an analyst at Jefferies & Co. in San Francisco, wrote today in a note. He rates Chipotle as underperform, the equivalent of a sell recommendation.

High Valuation

Yesterday, the Chipotle also said it was planning to add catering services to its stores in the U.S. to help boost revenue.

David Einhorn, head of Greenlight Capital Inc., said in October that Chipotle’s valuation is too high and the company will face challenges from Taco Bell. He recommended selling the stock short, referring to the practice of borrowing shares and selling them, with the goal of profiting by repurchasing them later at a lower price.

Chipotle, which has more than 1,400 locations, opened its first Asian-themed restaurant in 2011 called ShopHouse in Washington and is expanding the brand to the West Coast. ShopHouse diners move along a service line and customize their food when ordering, similar to Chipotle stores.

To contact the reporters on this story: Chris Burritt in Greensboro at cburritt@bloomberg.net; Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net