A onetime shining star among restaurant stocks, Chipotle Mexican Grill (CMG 0.43%) is feeling a little burned in 2022, along with other growth stocks. Its stock price slumped further over the past several weeks (down about 4.5%) despite the rather good third-quarter results it posted on Oct. 26. Over the same timeframe, the S&P 500 index was up 2.5%.

Perhaps the naysayers on this fast-casual restaurant chain are right. Times might be getting a little tougher in the near term as Chipotle gazes into the maw of a weakening economy. On the other hand...

Earnings offered a healthy mouthful in Q3

If we go purely by the quarterly results, Chipotle didn't deserve the sell-off. The restaurant chain reported $2.2 billion in revenue, which essentially met analyst expectations and represented a beefy year-over-year increase of almost 14%. That was on the back of comparable-restaurant sales that rose at a nearly 8% clip.

As for profitability, non-GAAP (adjusted) net income landed at just under $266 million, resulting in adjusted diluted earnings per share of $9.51. That makes for a net margin of 12% -- very high for the typically thin-margin restaurant industry. That amount, by the way, was 33% higher than in the same period a year ago, and it trounced the average analyst forecast of $9.17 per share.

What put all that zip into Chipotle's metrics during the quarter? The obvious answer is that the company was operating from a relatively low base, since the coronavirus pandemic was much less threatening and restrictive this past third quarter than in 2021. 

Yet that's also likely a reason investors haven't been higher on the stock in the wake of the earnings report. It's obvious to anyone strolling around a city or inside a shopping mall that the popularity of in-person dining has returned. So while double-digit growth is always welcome, it was entirely in the cards for popular restaurant chains like Chipotle.

Of course, stocks trade on future potential -- not trailing results -- and that's another rub for the company. The leading inflation indicators have come down some of late, but they are still elevated and dragging on the economy. Chipotle did raise prices in order to compensate for both higher input prices and weaker customer purchasing power. However, prices can only be raised so much before would-be diners start to defect.

Chipotle's food is still considered a good value, but even tasty and cheap fast-casual eats are considered discretionary spending. Such expenses are often the first budget items to go when an individual's (or a household's) budget starts to tighten. Considering that, it's hardly surprising that some investors are shunning the stock right now.

Take a bite of this stock while it's on sale

Here's the thing, though; the main pillar of Chipotle's strategy is to become an even more common sight in the American shopping mall or Main Street. After all, there's power in presence -- just look at Starbucks (SBUX 0.72%), which always seems to have a cafe within easy driving distance in the U.S.

As for Chipotle, it plans to eventually more than double its restaurant count, from over 3,100 at present to 7,000. That's not Starbucks-level ubiquity, but it does represent quite a dramatic enlargement of the company's footprint.

Chipotle is a bit fuzzy on when exactly it wants to hit this goal, but it's keeping up a steady pace in building new locations. It opened 136 from January to the end of September and says it aims to end this year with a total of 235 to 250. In 2023, the goal is to open a further 255 to 285. As evidenced by those high margins of late, this sort of bulding program is well within its means and doesn't threaten its profitability. 

The path to 7,000 is a long one. Assuming the company keeps its current rate of openings more or less steady and we take the upside of its projected 2023 range, it would take in excess of 13 years to reach that 7,000-restaurant goal.

I think that's a smart strategy. Chipotle's recent fundamentals have been strong, and it's shown a clear ability to survive -- heck, to thrive -- through challenging times like pandemics and economic slowdowns. So there's no rush to double that restaurant count.

The history of American business is rife with failed companies that were tempted to expand too fast, too soon. Chipotle's being cautious and deliberate about its build-out, and as the steady march progresses I'm sure we'll continue to see solid growth rates and those satisfyingly high margins.


Chipotle is confident it can keep up the good work and analysts are too. For its current fourth quarter, management estimates that sales "comps" will be in the mid- to high-single-digit percentages -- in other words, close to the third-quarter result. Meanwhile, the analysts are modeling an almost 29% improvement in per-share earnings for the full-year 2023, on the back of a nearly 14% rise in revenue.

A fearful market gives us an opportunity to buy quality companies on the cheap. With a potential economic winter on the way, investors are finding many one-time discretionary consumer darlings unattractive just now. Case in point: Chipotle, a company that's still very much on the way up and worthy of investment consideration.