This as soon as high-flying restaurant inventory is going through a brand new actuality lately.
Chipotle Mexican Grill (CMG 2.12%) reported its monetary outcomes for the second quarter on Wednesday afternoon, and the market was disenchanted, to say the least. The corporate’s adjusted earnings per share matched Wall Avenue’s estimates, however its income of $3.1 billion was under expectations. From the place they closed on Wednesday, shares fell by greater than 14% within the following session, and had been nonetheless down by greater than 12% as of late afternoon Friday.
This restaurant inventory has nonetheless been a rewarding holding for its long-term buyers, because it has climbed 102% in simply the previous 5 years. However some pessimism has taken maintain, and it at the moment trades 32% off its peak. Does this setup make Chipotle a once-in-a-generation funding alternative?
Picture supply: Getty Pictures.
Not satisfying buyers’ appetites
Prior to now few years, particularly because the onset of the COVID-19 pandemic, Chipotle has put up some spectacular monetary performances. That is why its current weak point warrants a deeper dive.
All retail and restaurant chains focus intensely on rising same-store gross sales (aka comps), as that signifies their capacity to drive income features from current areas. Chipotle posted same-store gross sales progress of seven.9% in 2023 and seven.4% in 2024. However within the first quarter of this yr, its comps declined by 0.4% yr over yr, and in Q2, they fell by 4%. Administration has downgraded its steerage to say that it now believes Chipotle’s same-store gross sales for the yr shall be flat.
Foot visitors, as measured by variety of transactions, fell by 4.9% within the second quarter. This adopted a 2.3% drop in Q1. That is definitely what’s inflicting buyers to lose confidence. The present macroeconomic surroundings is not serving to the state of affairs.
“I believe a lot of what we’re experiencing proper now is because of macro, and the buyer, the low-income client, is searching for worth,” CEO Scott Boatwright stated on the earnings name. Weak client sentiment is a drag on the enterprise. “I believe that is in all probability the most important headwind we face,” he stated.
Remember the optimistic attributes
It could be straightforward for buyers to get caught up within the current struggles of this firm. Nevertheless, whereas they positively deserve some consideration, it is necessary to give attention to Chipotle’s favorable traits. And its long-term prospects stay vibrant.
This can be a worthwhile enterprise that is a gold-standard operator within the restaurant business. Chipotle’s restaurant-level working margin — a metric that strips away company overhead prices to spotlight how the front-line shops are doing — got here in at an outstanding 27.4% in Q2. The enterprise has additionally emphasised operational efficiencies. Most lately, that has meant leveraging revolutionary instruments, processes, and applied sciences to spice up productiveness at its eating places.
Even amid the current sluggishness, Chipotle has continued to broaden at a speedy clip. To this point this yr, it has opened 113 web new shops. It plans to finish 2025 having added 330 new areas to its footprint. Given its restaurant-level profitability and its common annual unit gross sales quantity of over $3.1 million, it is sensible that administration has stored its foot on the gasoline pedal.
There are actually 3,839 Chipotle shops in complete. Nevertheless, the corporate goals to be a lot bigger sooner or later. Administration reiterated its goal of getting 7,000 areas within the U.S. and Canada at some point. Income and earnings shall be considerably higher at that degree of scale.
Buying and selling at a five-year low
Chipotle was as soon as a high-flying inventory. Within the 5 years main as much as its all-time excessive in June 2024, shares rose by an awe-inspiring 368%. Because of this efficiency, its valuation was too steep, for my part.
That state of affairs has modified. Buyers can scoop up shares immediately at a price-to-earnings ratio of about 40. That is the most affordable valuation a number of that the inventory has traded for since July 2020. I would not go as far as to say Chipotle is a once-in-a-generation alternative, however buyers ought to nonetheless think about shopping for shares.
Neil Patel has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Chipotle Mexican Grill. The Motley Idiot recommends the next choices: brief September 2025 $60 calls on Chipotle Mexican Grill. The Motley Idiot has a disclosure coverage.
