Chipotle Mexican Grill, Inc.'s (NYSE:CMG) fourth-quarter 2017 results are in, and on the surface, it's a decent report with moderate growth, a jump in comps -- the highly scrutinized measure of sales at restaurants open for more than one year -- and improved profits. But at the same time, issues remain that should worry investors. 

Chief among them is that all-important comps result. Chipotle reported a small 0.9% increase from last year, entirely due to higher prices, while transactions actually tumbled year over year. In short, the fast-casual burrito giant just isn't bringing back more customers right now. 

A Chipotle burrito and side of guacamole with chips.

Image source: Chipotle Mexican Grill.

Let's dig into the earnings report and see what's happening. 

Operating results: Improvement, with a side of worry

Here's a closer look at key metrics for Chipotle's fourth quarter: 

Metric Q4 2017 Q4 2016 Year-Over-Year Change
Revenue  $1,110.1  $1,034.6 7.3%
Net income  $43.79  $15.98 174.1%
Earnings per share  $1.55  $0.55 181.8%
Comps 0.9% (4.8%) N/A
Restaurant operating margin 14.9% 13.5% 10.4%
Labor percent of sales 27.5% 27.5% 0%
Food/packaging percent of sales 34.2% 35.3% 3.2%
Occupancy/other operating costs percent of sales 23.4% 23.7% 1.3%

Revenue and net income in millions. Data source: Chipotle Mexican Grill. 

At this stage, plenty of investors are looking for progress. Compared to the year-ago fourth quarter, Chipotle did show improvement in multiple categories, though its operating results were similar to those in the third quarter

Traffic remains one particular area of concern. Last quarter, Chipotle reported 1% comps growth, but attributed the increase to revenue recognition related to the "Chiptopia" promo from the year before. Adjusting for this boost, comps were flat with higher ticket prices offsetting lower traffic. Fast-forward to the current quarter, the story is similar, albeit somewhat improved. 

In the earnings release, the company reported that it took a 0.6% reduction to comps in the fourth quarter related to "Chiptopia" deferred revenue. Adjusting for that, comps would have climbed 1.5%, a meaningful improvement from the flat adjusted comps in the third quarter. Unfortunately, that good news is moderated by more negative traffic results. There were fewer comp transactions than last year, while higher average tickets after prices were raised in the second and fourth quarters more than offset the traffic decline. 

The big takeaway here is that Chipotle is still drawing fewer customers to its restaurants than it was prior to its sales and profits peaking in late 2015 before two major foodborne illness incidents drove customers away in, well, droves. How big of a concern is this? Over the past year or two, one could have pointed at the so-called "restaurant recession" as playing some role in Chipotle's traffic count remaining slow to recover.

But in more recent quarters, that excuse may not hold water anymore. After all, a lot of other slow-growth chains have delivered huge comps growth recently. McDonald's (NYSE:MCD), for instance, just reported 4.5% comps growth in the U.S. and 5.5% global comps growth in the fourth quarter driven by higher traffic, according to the company. This helped it deliver 8% system sales growth, adjusted for currency fluctuations, and full-year comps growth of 5.3%. And while there's a difference in the value propositions of McDonald's and Chipotle, the point is that other chains have been growing sales and traffic over the past year. 

Fewer customers mean lower expectations

After seeing traffic start to bounce back in December 2016 and early 2017, the past six months have seen that trend reverse, with even fewer transactions happening versus the year-ago quarter. If it weren't for two price increases during the year, comps would have fallen in 2017. Management also says it expects traffic to remain weak in the first half of the year. 

Taking that, and a significantly scaled-back new store expansion plan, it seems like it's time for investors to revise their expectations. No longer can we count on 200-220 new locations per year (the new forecast is for 130-150 openings in 2018) and 5% comps growth to deliver 20% sales growth and even higher earnings-per-share growth.

Heading into 2018, the benefit of the Tax Cuts and Jobs Act will result in more profits, but it will take another year for Chipotle to realize the full benefit because of taxes associated with some stock-based compensation that may or may not be awarded. In short, it estimates a tax rate between 30% and 31% this year and between 27% and 28% going forward in 2019. Its effective tax rate in 2017 was 36.1%. 

The company will expand its restaurant count by 5%-6% in 2018, and expects comps growth in the "low single digits" range. Management also said that it will save $40 million to $50 million in taxes this year, but intends to spend more than one-third of that on employees, including some one-time cash and stock bonuses, as well as improved permanent benefits, while also investing significantly more in its existing restaurants (rather than building new ones) than last year. 

Putting it all together, Chipotle remains a great business and an appealing brand. But that appeal may have weakened over the past couple of years as reflected in the reduced traffic rates. Factoring in a slowed pace of expansion, it appears investors would do well to keep their expectations modest for now. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.