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Chipotle Stock Slides 11% in 3 Months: Buy the Dip or Hold Off?
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Shares of Chipotle Mexican Grill, Inc. (CMG - Free Report) , which soared 43.4% in the past year, have now hit a rough patch, losing momentum despite the recent stock split. In the past three months, the stock has declined 10.5% against the industry’s and the S&P 500’s rise of 5.3% and 7.1%, respectively.
Closing at $55.77 in the last trading session, the stock stands almost 19.5% below its 52-week high of $69.26. Technically, CMG is trading below its 50-day moving average but above its 200-day moving average. The company also underperformed other industry players like Darden Restaurants, Inc. (DRI - Free Report) , up 5.4%, Restaurant Brands International Inc. (QSR - Free Report) , up 3.5%, and CAVA Group, Inc. (CAVA - Free Report) , up 27.1%
Image Source: Zacks Investment Research
What’s Hurting CMG?
The recent decline is due to an online customer backlash over claims that CMG reduced portion sizes while increasing prices. Although management denies reducing portions, they have acknowledged raising prices to offset inflation and higher input costs. It attributes these portion concerns to the natural variation in meal customization, but this explanation hasn't eased dissatisfaction. In response, management pledged to standardize larger portion sizes to prevent further criticism.
Like other industry players, the company has been facing wage inflation and higher costs across most commodities and categories. Beef and produce inflation and a challenge in protein mix resulting from the Braised Beef Barbacoa marketing initiative continue to propel costs. For third-quarter 2024, it anticipates the cost of sales to be approximately 31%. For the quarter, the company anticipates its labor expenses to remain around the low-25% range. For 2024, the cost of sales is expected to be in the low to mid-single-digit range.
Chipotle investors are concerned about CEO Brian Niccol's potential departure because he's been instrumental in the company’s turnaround since 2018. Niccol rejuvenated the brand on the back of substantial growth and successfully introduced initiatives like digital expansion and menu innovation. His leadership significantly influenced Chipotle's strong stock performance and competitive market standing. Losing such a crucial leader raises concerns about the company’s ability to sustain its current success and continue on its growth trajectory.
CMG Estimate Revision & Valuation
Estimates for CMG’s 2024 earnings have moved down from $1.10 to $1.08 in the past 60 days.
Image Source: Zacks Investment Research
From the valuation point of view, the stock is still trading at a premium despite the recent decline. Chipotle’s forward 12-month price-to-earnings ratio stands at 45.97, significantly higher than the industry’s ratio of 24.19 and the S&P 500's ratio of 21.65. This suggests that investors may be paying a high price relative to the company's expected earnings growth.
Image Source: Zacks Investment Research
CMG's Long-Term Stability Holds Firm
The company continues to benefit from impressive comps growth. During second-quarter 2024, comparable restaurant sales increased 11.1% year over year, following growth of 7% (in first-quarter 2024), 8.4% (in fourth-quarter 2023), 5% (in third-quarter 2023), 7.4% (in second-quarter 2023) and 10.9% (in first-quarter 2023). The upside can be attributed to higher transactions, increased average checks and new restaurant openings. This, along with the consistent digital sales strength and solid in-restaurant sales recovery, contributed to its results. For 2024, Chipotle anticipates comps growth in the mid to high-single-digit range, driven by its transaction growth and strong comps growth trends.
The company’s emphasis on advertising initiatives is proving successful. The marketing team effectively increased the brand's visibility, relevance and popularity. The recent comeback of the beloved Chicken Al Pastor as a limited-time offer exceeded expectations. It also introduced the Carne Asada Quesadilla, showcasing the collaborative effort to reintroduce this popular menu item, especially noteworthy considering that only approximately 5% of U.S. beef meets Chipotle's food integrity standards.
CMG continues to focus on restaurant expansion. In second-quarter 2024, Chipotle opened 53 new restaurants, with 46 locations, including a Chipotlane. The addition of Chipotlane enhanced customer access and convenience and bolstered new store restaurant sales, margins and returns. It continues to expand its digital drive with Chipotlane. CMG expects to open 285-315 restaurants (assuming developer, permit, inspection and utility delays do not impact) in 2024, mostly concentrated in North America, with more than 80% of them including a Chipotlane.
The company is making progress in smoothing out the pace of restaurant openings, with a notable increase in construction compared with the previous year’s tally. The company emphasized opening a second restaurant in Kuwait and expanding into Dubai in partnership with the Alshaya Group. In Europe, efforts are underway to align operations with North American standards, leveraging lessons learned from the booming Canadian market. It continues to be optimistic about future growth opportunities.
Conclusion
The Zacks Rank #3 (Hold) company remains a solid long-term investment due to its strong fundamentals and impressive growth metrics despite facing recent challenges. Existing investors should hold onto their shares. Potential new investors should be cautious about entering the stock at its current elevated valuation and amidst ongoing challenges. Restricting new entries until the stock stabilizes and addressing its short-term issues more effectively could be a prudent approach.
Image: Bigstock
Chipotle Stock Slides 11% in 3 Months: Buy the Dip or Hold Off?
Shares of Chipotle Mexican Grill, Inc. (CMG - Free Report) , which soared 43.4% in the past year, have now hit a rough patch, losing momentum despite the recent stock split. In the past three months, the stock has declined 10.5% against the industry’s and the S&P 500’s rise of 5.3% and 7.1%, respectively.
Closing at $55.77 in the last trading session, the stock stands almost 19.5% below its 52-week high of $69.26. Technically, CMG is trading below its 50-day moving average but above its 200-day moving average. The company also underperformed other industry players like Darden Restaurants, Inc. (DRI - Free Report) , up 5.4%, Restaurant Brands International Inc. (QSR - Free Report) , up 3.5%, and CAVA Group, Inc. (CAVA - Free Report) , up 27.1%
Image Source: Zacks Investment Research
What’s Hurting CMG?
The recent decline is due to an online customer backlash over claims that CMG reduced portion sizes while increasing prices. Although management denies reducing portions, they have acknowledged raising prices to offset inflation and higher input costs. It attributes these portion concerns to the natural variation in meal customization, but this explanation hasn't eased dissatisfaction. In response, management pledged to standardize larger portion sizes to prevent further criticism.
Like other industry players, the company has been facing wage inflation and higher costs across most commodities and categories. Beef and produce inflation and a challenge in protein mix resulting from the Braised Beef Barbacoa marketing initiative continue to propel costs. For third-quarter 2024, it anticipates the cost of sales to be approximately 31%. For the quarter, the company anticipates its labor expenses to remain around the low-25% range. For 2024, the cost of sales is expected to be in the low to mid-single-digit range.
Chipotle investors are concerned about CEO Brian Niccol's potential departure because he's been instrumental in the company’s turnaround since 2018. Niccol rejuvenated the brand on the back of substantial growth and successfully introduced initiatives like digital expansion and menu innovation. His leadership significantly influenced Chipotle's strong stock performance and competitive market standing. Losing such a crucial leader raises concerns about the company’s ability to sustain its current success and continue on its growth trajectory.
CMG Estimate Revision & Valuation
Estimates for CMG’s 2024 earnings have moved down from $1.10 to $1.08 in the past 60 days.
Image Source: Zacks Investment Research
From the valuation point of view, the stock is still trading at a premium despite the recent decline. Chipotle’s forward 12-month price-to-earnings ratio stands at 45.97, significantly higher than the industry’s ratio of 24.19 and the S&P 500's ratio of 21.65. This suggests that investors may be paying a high price relative to the company's expected earnings growth.
Image Source: Zacks Investment Research
CMG's Long-Term Stability Holds Firm
The company continues to benefit from impressive comps growth. During second-quarter 2024, comparable restaurant sales increased 11.1% year over year, following growth of 7% (in first-quarter 2024), 8.4% (in fourth-quarter 2023), 5% (in third-quarter 2023), 7.4% (in second-quarter 2023) and 10.9% (in first-quarter 2023). The upside can be attributed to higher transactions, increased average checks and new restaurant openings. This, along with the consistent digital sales strength and solid in-restaurant sales recovery, contributed to its results. For 2024, Chipotle anticipates comps growth in the mid to high-single-digit range, driven by its transaction growth and strong comps growth trends.
The company’s emphasis on advertising initiatives is proving successful. The marketing team effectively increased the brand's visibility, relevance and popularity. The recent comeback of the beloved Chicken Al Pastor as a limited-time offer exceeded expectations. It also introduced the Carne Asada Quesadilla, showcasing the collaborative effort to reintroduce this popular menu item, especially noteworthy considering that only approximately 5% of U.S. beef meets Chipotle's food integrity standards.
CMG continues to focus on restaurant expansion. In second-quarter 2024, Chipotle opened 53 new restaurants, with 46 locations, including a Chipotlane. The addition of Chipotlane enhanced customer access and convenience and bolstered new store restaurant sales, margins and returns. It continues to expand its digital drive with Chipotlane. CMG expects to open 285-315 restaurants (assuming developer, permit, inspection and utility delays do not impact) in 2024, mostly concentrated in North America, with more than 80% of them including a Chipotlane.
The company is making progress in smoothing out the pace of restaurant openings, with a notable increase in construction compared with the previous year’s tally. The company emphasized opening a second restaurant in Kuwait and expanding into Dubai in partnership with the Alshaya Group. In Europe, efforts are underway to align operations with North American standards, leveraging lessons learned from the booming Canadian market. It continues to be optimistic about future growth opportunities.
Conclusion
The Zacks Rank #3 (Hold) company remains a solid long-term investment due to its strong fundamentals and impressive growth metrics despite facing recent challenges. Existing investors should hold onto their shares. Potential new investors should be cautious about entering the stock at its current elevated valuation and amidst ongoing challenges. Restricting new entries until the stock stabilizes and addressing its short-term issues more effectively could be a prudent approach.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.