After being a strong performer the past few years, shares of Chipotle Mexican Grill (CMG 0.54%) have gone from being hot to mild over the past year. The stock is down more than 12% year to date and is about break-even over the past year, as of this writing.
The company has been through some changes over the past year with its longtime successful CEO leaving for rival Starbucks and it having to retrain some restaurants that were skimping on portion sizes.
Let's take a look at the buy and sell cases for Chipotle.
NYSE: CMG
Key Data Points
The buy case
Chipotle stock lost some of its steam when longtime CEO Brian Niccol left for a big payday at Starbucks. Niccol was responsible for helping the company move past its prior foodborne illness issues as well as leading the charge on technological innovations to help improve worker and supply chain efficiency. He also was responsible for the Mexican food chain's big push into mobile ordering and its loyalty program, both of which helped drive traffic to its restaurants.
While Niccol will be missed, the good thing is that all these advances stay behind, as does a seasoned management team. Meanwhile, the company continues to push innovation even after Niccol's departure. Some examples of this include using an AI-powered hiring platform to help improve staffing, testing an avocado-cutting robot, and introducing a dual-sided plancha (griddle) and produce slicer to help improve prep time and cooking processes.
Meanwhile, Chipotle continues to be a popular brand with strong pricing power. This can be seen in the company's comparable-restaurant sales, which have been driven by both price increases and traffic gains. That's a powerful combination for a restaurant operator.
| Metric | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 |
|---|---|---|---|---|---|---|---|---|
| Same-store sales | 10.9% | 7.4% | 5% | 8.4% | 7% | 11.1% | 6% | 5.4% |
Data source: Chipotle.
If same-store sales ever really start to feel pressure, the restaurant operator always has the option to expand into breakfast to help drive results. Desserts is another area the company could look to if needed.
Chipotle also has always had some of the best restaurant level margins (RLMs) in the quick service industry. RLMs measure the profitability of its restaurants before corporate costs. Chipotle's success in this area is due to its assembly line process and limited number of ingredients, as well as the aforementioned technological innovations the company introduced. Fewer ingredients and its assembly process help lead to improved efficiency and throughput while less ingredients also lead to better buying power as the company gained scale.
In addition, Chipotle still has plenty of store expansion opportunities. It has plenty of runway in the U.S. to grow its restaurant base by 8% to 10% annually, while it has barely touched the surface internationally with only 85 restaurants outside the U.S., 55 of which are in Canada.
Image source: Getty Images.
The sell case
While Chipotle has been performing well, its growth story has seen recent hiccups. On its last earnings call, management said it saw its comparable-restaurant sales dip 2% in January, hurt by severe weather, the Los Angeles wildfires, and an unfavorable calendar shift (New Year's Day fell midweek, which impacted consumers' routines). It is now only looking for flat comparable-store sales during the first quarter.
While this could just be a small setback, it is something to watch to make sure it's not the start of a trend. Weather can indeed play a big role in restaurant sales, as people may not like to go out in cold and wintry conditions. However, there is third-party delivery nowadays, which should help somewhat mitigate weather impacts, so it is something to continue to monitor.
Meanwhile, the company's restaurant level margins have come under some pressure recently due to it having to increase portions at locations that were underserving customers. This became a big social media trend last year where customers began filming employees making their meals, and some locations were clearly falling short of their portion sizes. Last quarter, its RLMs dropped from 25.4% a year ago to 24.8% as Chipotle increased portion sizes at about 10% of its locations that were guilty of this practice. Meanwhile, it could face additional cost pressures related to tariffs, especially if avocado prices rise.
The verdict
While Chipotle is experiencing some near-term headwinds, its long-term story remains intact. Customers continue to enjoy the company's cuisine, while it has a long runway of expansion still in front of it. I also think it has the breakfast option in its back pocket. Breakfast burritos anyone?
As such, I think the stock is a buy for long-term oriented investors.
