Chipotle Mexican Grill (NYSE: CMG) has long been a high-performing stock, but the burrito chain has struggled to win back investor confidence in recent years.
The stock has fallen more than 50% from its peak, weighed down by slowing sales growth, leadership changes, and a compression of its once-premium valuation.
CMG is also down 10% year-to-date, reflecting a string of disappointing quarterly results that have left investors increasingly cautious.
In the first quarter, comparable sales rose just 0.5%, marking the best performance in at least five quarters, though the bar had been set very low.
Operating margin fell sharply during that period, declining from 16.7% to 12.9%, partly due to Chipotle’s biennial All Managers Conference and rising labor costs from labor inflation.
Average restaurant sales also declined each quarter during that stretch, reaching $3.09 million in the first quarter, a trend that has weighed on overall revenue momentum.
Chipotle has faced many of the same headwinds as its peers, including inflation-pinched consumers, a pullback from lower-income customers and young adults, and rising competition from casual dining chains like Chili’s.
The war in Iran has pushed inflation higher in the second quarter, meaning Chipotle is unlikely to get any relief from discretionary spending at the macro level.
Some positive signals exist heading into the Q2 report, with location intelligence platform Placer.ai tracking positive same-store traffic in every month of the second quarter, averaging about 1% growth.
Chipotle also relaunched its rewards program during the quarter, adding perks like monthly free food drops and making it easier to redeem points, with sign-ups spiking when the company announced the program.
The stock’s significant decline has made it more reasonably priced, now trading at a price-to-earnings ratio of about 30, roughly in line with the S&P 500.
That valuation offers some downside protection, but analysts are not expecting bottom-line improvement, with consensus calling for earnings per share to edge down from $0.33 to $0.32.
If profits fall again when Chipotle reports on July 29, the stock is likely to sell off, as investors continue to demand proof of a sustained recovery.
Chipotle remains a show-me story at this point, and management will have to demonstrate it has overcome the challenges of the last few years to restore investor confidence in CMG.
