Chipotle: Getting roasted after earnings, double digit decline

Chipotle is one of the symbols of fast food in the USA. They published results after which the stock price plummeted, despite the company beating market consensus. The company failed in an extremely crucial area, signaling to investors that the current and expected growth is almost impossible to achieve. After the publication, shares fell by about 16%.
At first glance, the results look good for a company of this scale of operations.

• Revenue increased by $3.0 billion, which represents a growth of over 7% year-on-year.
• Adjusted EPS grew by 7.4%.
• Generous share buyback at the level of $686.5 million.
• Additionally, the restaurant plans to open over 315 locations in 2025 and at least 350 openings in 2026.

So what is the problem? Subsequent sections of the financial report bring increasing disappointments and threats.

• Decline in operating and restaurant margins, to 15.9% and 24.5%, respectively.
• Like-for-like sales: +0.3%

The market had high expectations for the company. Chipotle performed very well in 2023-2024. Attractive loyalty programs and operational improvements significantly boosted the company's revenue, but in mid-2024, the first signs appeared that the growth rate was unsustainable.

Chipotle is experiencing pressure from two main directions. The first factor is a type of market risk. A significant portion of the restaurant's menu includes beef, whose price has skyrocketed this year due to accumulating tensions and weaknesses in the sector. However, this is just one problem; the second threat to the company is much more serious and lasting, which the management openly discusses.

The target customers of the chain, people aged 25-35 and households with up to $100,000 annual income, account for about 40% of sales. As the company admits, demand among this key group is collapsing. Unemployment and consumer sentiment indicators are worsening, but they do not reflect the severity of the situation. The poorer and younger part of society feels all the effects of inflation and pressure on the labor market much more acutely than the rest, while not benefiting at all from rising asset prices. Quite the opposite. And this is not a unique failure for Chipotle. Reuters reports that this is a trend across the entire industry, as reflected in competitors' financial reports.

The company has cut its forecast for the third time this year, now indicating a decline in "LfL" in "low single digits" in 2025.
The company simultaneously declares a "slow and cautious" approach to price increases. Incomplete passing of costs to customers will create short-term pressure on margins but will allow for maintaining a larger customer base. Meanwhile, sustained rapid network expansion is intended to preserve scale potential. These remedial actions are promising in the long term, but many investors will expect growth here and now.

CMG.US (D1)

Source: xStation5