Chipotle Shares Fall Despite Continued Traffic Gains. Is This a Buying Opportunity for the Stock?

Chipotle Mexican Grill (NYSE: CMG) slipped following the release of its fourth-quarter results, despite the company reporting continued gains in traffic. As of this writing, the stock is down 5% year to date, extending its two-month decline to 12%.

Let's delve into Chipotle's recent earnings to see if now is a good time to buy the stock.

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A tough start to January

The popular fast-casual restaurant chain once again put up solid quarterly results that would be the envy of most quick-service restaurants. Revenue climbed 13% year over year to $2.85 billion, which met analyst expectations. Comparable-restaurant sales jumped 5.4%, slightly below the 5.7% increase expected by analysts, as compiled by StreetAccount.

Transactions grew 4.0%, helped by better throughput and a limited-time offer (LTO) of smoked brisket, while the average check rose 1.4%. However, January was off to a tough start with same-store sales down about 2% for the month. The company said it saw a sizable impact from severe weather, the Los Angeles wildfires, and an unfavorable calendar shift (New Year's Day fell on a Wednesday, delaying the return of consumers to their regular routines). Combined, these headwinds had about a 400 basis-point impact on comparable-restaurant sales, and management is now looking at flattish comparable sales for Q1 2025.

Adjusted earnings per share (EPS), meanwhile, climbed 19% to $0.25, topping the $0.24 consensus.

Cost of sales rose 70 basis points to 30.4% as Chipotle continues to refocus on larger portions while also experiencing some higher inflation and costs associated with its brisket LTO. Labor costs as a percentage of sales edged up 20 basis points to 25.2% due to wage inflation.

These numbers are important as they feed into restaurant-level profit margin, which fell to 24.8% from 25.4% a year ago. This metric measures how profitable each individual restaurant is, an area where Chipotle has always shone brightly with its very efficient model. While increasing portions may have been necessary to keep customers happy, it has affected profitability. The company will look toward innovation and other efficiencies to bring its restaurant-level margins back up.

Chipotle opened 119 new company-owned locations in the quarter, and 304 in 2024. It plans to open 315 to 345 new restaurants this year.

Looking ahead, Chipotle expects full-year 2025 same-store sales to grow in the low- to mid-single-digit range. Management plans to increase prices about 2% on the year. With the new administration's tariffs making headlines, the company also noted it sources about 2% of its sales from Mexico and less than 0.5% from Canada and China. Overall, tariffs would impact the cost of goods by about 60 basis points if implemented, but Chipotle can fully offset them in the second half of the year through supply chain efficiencies.

Image source: Getty Images.

Time to buy the dip?

While Chipotle ran into some minor same-store-sales issues in January, there's nothing that appears to be altering the company's long-term path. Chipotle has a long history of innovation, such as introducing a machine that cuts, cores, and scoops avocados, to improve its operations. This should eventually offset the restaurant-level margin pressure it's recently experienced.

Meanwhile, the company still has a solid runway to keep adding new locations at a 8% to 10% clip annually. There's plenty of room in the U.S. to expand, and it's really just touching the surface internationally. The opportunity is pretty big: Chipotle only has 85 restaurants outside the U.S., and 55 of those are in Canada. It will work on accelerating expansion in Canada and the Middle East this year; it's also looking to grow its pipeline in Western Europe.

From a valuation perspective, the stock trades at a forward price-to-earnings (P/E) multiple of about 44 based on 2025 estimates, comfortably within the range it has seen in the past few years.

Data by YCharts.

Over the long term, Chipotle will continue to be one of the restaurant industry's biggest winners. The company is drawing in increased traffic while showing off its pricing power. At the same time, it has a clear path to expand its store count. Based on these factors, investors should buy the dip.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.