Chipotle’s Stock Drops Despite Strong Earnings: Is It Time to Invest?

Chipotle Mexican Grill (NYSE: CMG) saw its stock decline following the fourth-quarter earnings report, even with an increase in customer traffic. Currently, the stock is down 5% year-to-date, continuing a two-month downward trend of 12%.

Let’s analyze Chipotle’s recent performance to determine if investing in the stock now is a smart choice.

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Challenging Start to January

Chipotle reported impressive quarterly results, showing continued growth that would interest many quick-service restaurants. Revenue increased by 13% year-over-year, reaching $2.85 billion, meeting analyst expectations. Comparable restaurant sales rose by 5.4%, although this figure was slightly below the anticipated 5.7% increase according to StreetAccount.

The number of transactions grew by 4.0%, partly due to improved service speed and a promotional offer of smoked brisket, while the average check increased by 1.4%. However, January proved challenging, with same-store sales trending down by approximately 2% for the month. The company attributed this decline to severe weather events, the wildfires in Los Angeles, and a less favorable calendar (New Year’s Day fell on a Wednesday, delaying customer returns to their routines). Together, these factors negatively impacted comparable restaurant sales by around 400 basis points. Management now anticipates flat comparable sales for Q1 2025.

Adjusted earnings per share (EPS) rose by 19% to $0.25, slightly exceeding the consensus forecast of $0.24.

Cost of sales increased by 70 basis points to 30.4% as Chipotle focuses on larger portion sizes amidst higher inflation and costs from the brisket promotion. Labor costs as a percentage of sales also ticked higher by 20 basis points to 25.2%, primarily due to wage inflation.

These figures significantly influence the restaurant-level profit margin, which decreased from 25.4% a year ago to 24.8%. This measure indicates the profitability of each restaurant, a strength for Chipotle due to its efficient operations. While larger portions may enhance customer satisfaction, they have negatively impacted profit margins. The company aims to restore margins through innovation and efficiency improvements.

During the quarter, Chipotle opened 119 new company-owned locations, totaling 304 new restaurants in 2024. For the current year, the plan is to establish between 315 and 345 new locations.

Looking forward, Chipotle predicts that full-year 2025 same-store sales will grow in the low- to mid-single-digit range. Additionally, management intends to raise prices by approximately 2% during the year. In light of recent tariff discussions, the company noted it sources only about 2% of its sales from Mexico and less than 0.5% from Canada and China. If implemented, tariffs could impact goods costs by about 60 basis points; however, Chipotle plans to offset these costs through supply chain efficiencies by the second half of the year.

Image source: Getty Images.

Is Now the Right Time to Invest?

Despite facing minor same-store sales issues in January, Chipotle’s long-term outlook remains strong. The company is known for its innovative approaches, such as employing machines that cut, core, and scoop avocados, aimed at enhancing operational efficiency. This could help alleviate the recent pressure on restaurant-level margins.

Moreover, Chipotle has significant room for growth, projecting an annual expansion rate of 8% to 10%. There’s ample opportunity within the U.S. and a nascent international presence. With only 85 restaurants outside the U.S., 55 of which are located in Canada, the potential for expansion in Canada and the Middle East this year is considerable. Additionally, there are plans to develop in Western Europe.

From a valuation standpoint, the stock trades at a forward price-to-earnings (P/E) ratio of about 44 based on 2025 projections, consistent with its valuation range over the past few years.

Data by YCharts.

In the long run, Chipotle remains poised to be a standout in the restaurant industry. With increasing traffic, demonstrated pricing power, and a clear store expansion strategy, investors should consider this dip as a buying opportunity.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.