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Chipotle Falls After Einhorn Recommends Short Sale

October 02, 2012

Chipotle Declines After Einhorn Recommends Selling Short

Revenue at Chipotle Mexican Grill Inc. has increased at least 20 percent for the past nine quarters as it adds stores. Photographer: David Paul Morris/Bloomberg

Chipotle Mexican Grill Inc. (CMG:US) fell after hedge fund manager David Einhorn recommended selling the stock short during a presentation in which he also panned Green Mountain Coffee Roasters Inc. (GMCR:US)

Einhorn, head of Greenlight Capital Inc., said today at the Value Investing Congress in New York that Chipotle has too high of a valuation and will face challenges from Yum! Brands Inc.’s (YUM:US) Taco Bell chain. Taco Bell introduced higher-priced items in its U.S. stores earlier this year to help boost sales. The Cantina Bell menu has burritos and bowls with black beans, cilantro rice and pico de gallo priced at about $4.99.

“The biggest challenge comes from a resurgent Taco Bell,” Einhorn said. Chipotle’s ability to raise prices is limited given rising food costs and eventually worker health-care expenses, he said.

Chipotle’s shares have soared in recent years, reaching an intraday record of $442.40 in April after ending 2008 at $61.98. Revenue at Chipotle has increased at least 20 percent for the past nine quarters as it adds stores. Short selling refers to the practice of borrowing stock and selling it, with the goal of profiting by repurchasing the shares later at a lower price.

“Competition is nothing new for Chipotle,” Matthew DiFrisco, a New York-based analyst at Lazard Capital Markets who recommends holding Chipotle shares, said in an interview. Jack in the Box Inc. (JACK:US)’s Qdoba chain also competes with Chipotle, he said.

Chipotle slid 5 percent to $300.26 at 12:28 p.m. in New York and earlier tumbled as much as 8.2 percent for the biggest intraday decline since July 20. Denver-based Chipotle’s shares had dropped 6.4 percent this year through yesterday.

‘Different Customer’

“We don’t see Taco Bell as a challenge to our business at all,” Chris Arnold, a Chipotle spokesman, said in an e-mail. “We have a different customer base and very loyal customers. What’s more, the food we serve is very different than Taco Bell.”

Slower U.S. consumer spending has hurt Chipotle’s sales (CMG:US) with smaller gains as the year has progressed, Chief Financial Officer Jack Hartung said on a conference call in July. The company may also face higher commodity costs next year after the U.S. drought hurt the corn crop, he said.

Green Mountain

Einhorn also criticized Green Mountain and recommended selling the company short. The coffee brewer’s capital expenditures remain inexplicable and single-serve coffee price wars are just getting started, he said during the presentation.

“Now the field is open. Green Mountain faces competition from experienced manufacturers,” Einhorn said. “We already see competitive products entering the market at sizeable discounts” to Green Mountain, he said.

Green Mountain is seeing more rivalry from store-brand K- Cup manufacturers as its patents were set to expire in September. Safeway Inc. (SWY:US) and Kroger Co. (KR:US) make private-label capsules that fit into Keurig machines. Green Mountain has said it’s working on an espresso machine with Luigi Lavazza SpA to help boost sales.

“Since the early days of single-serve we have successfully competed against well-resourced companies like Mars and Kraft,” Suzanne DuLong, a spokeswoman for Waterbury, Vermont-based Green Mountain, said in an e-mailed statement.

“We have long anticipated the potential competitive dynamic that some are just now focusing on in connection with our patent expiry and it has been factored into our plans and our forecast,” she said.

Einhorn Criticism

Einhorn has criticized Green Mountain since at least October 2011, when he said the company needs to improve its disclosure and had a “litany of accounting questions.”

Green Mountain rose (GMCR:US) 2.2 percent to $23.82 after earlier dropping as much as 5.6 percent. The shares had declined 48 percent this year through yesterday.

Herbalife Ltd. (HLF:US), which Einhorn has previously criticized, rose after the hedge fund manager said he wouldn’t talk about the nutritional supplement company at today’s conference. Herbalife advanced (HLF:US) 2.4 percent to $51.40, after rising as much as 6 percent earlier.

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

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


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Companies Mentioned

  • CMG
    (Chipotle Mexican Grill Inc)
    • $667.93 USD
    • 16.51
    • 2.47%
  • GMCR
    (Keurig Green Mountain Inc)
    • $140.0 USD
    • 2.83
    • 2.02%
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