Down 33%, Is Chipotle a Buy Now?

Key Points

• Chipotle posted its second straight quarter of comparable sales decline.

• Management announced several initiatives to help drive long-term growth.

• The company aims to double its restaurant count to 7,000.

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Chipotle Mexican Grill (NYSE: CMG) has been one of the best-performing restaurant stocks of all time.

Since its 2006 IPO, the burrito roller is up more than 5,000%. However, the company is now facing what appears to be its biggest challenge since at least COVID, and possibly going back to its E. coli crisis.

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Following the departure of star CEO Brian Niccol, who took the top job at Starbucks nearly a year ago, Chipotle has now reported two straight quarters of declining comparable sales. Though weakening consumer sentiment and discretionary spending are at least partly to blame for its struggles, the setbacks are bad enough that new CEO Scott Boatwright announced a multi-step plan to get the company back to growth after the stock fell 13% on Thursday, meaning it's now down 33% from its peak from late last year.

The sell-off is understandable following the second-quarter results. Comparable sales fell 4% on a 4.9% decline in transactions, showing that customers simply aren't visiting as often. Revenue still rose 3% to $3.1 billion due to the effect of new store openings. Operating margin was down from 19.7% to 18.2%, while adjusted earnings per share fell from $0.34 to $0.33.

Management also lowered its comparable sales guidance to flat.

Image source: Getty Images.

Chipotle's plan to bounce back

On the earnings call, Boatwright described some of the changes he's making at the fast-casual chain and hinted at others. For example, Chipotle is rolling out a high-efficiency equipment package that includes new planchas, rice cookers, and fryers. Additionally, the company has added produce slicers to all restaurants to help improve prep times. Among other things, Boatwright is hopeful that this will drive greater demand for Chipotle's catering, driving it from 1% to 2% of sales to 5% to 10% of sales. It also sees opportunities to improve throughput.

To counter a slowdown in summer visits, the company is ramping up its marketing, and it has returned to positive comps as of June. The company launched Summer of Extras, a gamified experience allowing rewards members to earn extra points and prizes.

Boatwright also hinted at doing more to emphasize Chipotle's value proposition. It's unclear if that means offering something like a value menu or lower-cost items, or if Chipotle would emphasize its value in its marketing more.

The new CEO seems to be following in the footsteps of Niccol, who also adopted some of the classic strategies of traditional fast food. This includes the drive-thru, which Chipotle has modified to its Chipotlane, which requires customers to order digitally. Chipotle also introduced a one-hour buy-one, get-one (BOGO) free, which was available during the normally slow hour of 3 p.m. to 4 p.m.

Is Chipotle a buy?

Chipotle's price-to-earnings (P/E) valuation fell to a recent low on the sell-off at 40, but that's still expensive by conventional standards and compared to the S&P 500's P/E ratio of 27.4.

The recent decline in comparable sales may not be a reason to be alarmed, either. After all, the company has already returned to positive comps growth as of June and in July through the date of the report. We also know that restaurants have seen slowing growth this year due to weakening consumer sentiment, as spending on restaurants is one of the easiest areas for people to pull back on.

The fast-casual chain also continues to plan for having 7,000 restaurants over the long term, about double what it has today. Despite the recent weakness, there's no reason to think that there's any fundamental change in Chipotle's business model or its customer perception.

While the stock could be volatile over the coming months as the trade situation is still in flux, Chipotle still looks like a solid buy over the long term.

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Jeremy Bowman has positions in Chipotle Mexican Grill and Starbucks. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2025 $60 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.