Chipotle is a hit with customers today and has been for a long time. But don’t expect that to continue forever.
Chipotle Mexican Grill (CMG -1.67%) has been a huge success for investors. That’s largely because the brand concept has been a huge success with consumers. The latest sign of that is the company’s massive 11.1% same-store sales performance in the second quarter of 2024. That helped to drive overall revenue 18.2% higher. These were impressive results, but be careful about projecting this strength into the future.
Why Chipotle’s same-store sales matter
When you examine a restaurant’s sales, there are two numbers that are important. The first is the overall top line, or just sales. But that figure is made up of two things, sales at existing locations and the sales generated from newly opened restaurants. Because new restaurants can provide a large boost to revenue, investors also look at same-store sales, which examines the sales performance at locations that have been open for at least a year.
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If a restaurant’s top line is growing but its same store sales are weak or in decline it is a sign that the brand isn’t actually doing as well as the top line might indicate. This is actually fairly common with fast-growing chains, which sometimes get pushed so hard by Wall Street to grow the top line that they focus too much on new stores and neglect their core operations. It can end very badly for the restaurant and for investors.
Chipotle’s same-store-sales figure in the second quarter of 2024 was an incredibly strong 11.1%, most of which came from more traffic at existing stores. That was even faster than the 7% it achieved in the first quarter, which itself was up from a solid 5.6% in the fourth quarter of 2023. It looks like consumers are increasingly going to Chipotle to eat, which is very good news for the company.
Is there a problem with Chipotle’s strong performance?
There are a number of reasons why Chipotle could be resonating with consumers right now, from value for money to Mexican food being on trend to the company’s innovation efforts. It could be all three, and there could still be other reasons, too. The problem is that investors can’t expect Chipotle to achieve 11.1% same-store sales forever. In fact, even 5.6% would be a pretty high bar to achieve for an extended period of time.
To put some scale on this, look no further than fast-food giant McDonald’s (MCD 2.95%). In its first-quarter 2024 news release it highlighted, “Global comparable sales have grown nearly 2% for the quarter, marking 13 consecutive quarters of positive comparable sales growth.” So one of the most successful restaurant concepts on Earth is happy that it has achieved low-single-digits same-store sales for roughly three years running. Note that second-quarter same-store sales dropped 1%, so the streak noted in the first quarter is now over.
CMG data by YCharts
Then there’s Darden Restaurants (DRI -0.91%), which owns multiple restaurant concepts. In the fourth quarter of fiscal 2024, Olive Garden, its largest brand, saw same-store sales fall 1.5% while LongHorn Steakhouse, its second-largest brand, had same-store results rise 4%. In the third quarter of 2024 Olive Garden’s same-store sales rose 4.4% while LongHorn gained 7.1%. Clearly, good news doesn’t always last and Chipotle’s huge same-store sales numbers look very much like outliers when you examine some of the largest and most successful restaurant concepts.
CMG PE Ratio data by YCharts
With a price-to-earnings ratio of nearly 49 times, which is kind of high for a restaurant even though it is below the five-year average for Chipotle, investors are still pricing in a lot of good news. Given the pullback that’s already taking shape, meanwhile, it looks like Wall Street is growing worried about the stock’s high valuation.
While there’s no reason to suspect that truly bad news is on the way, a downtick in same store sales could be viewed as yet another reason to sell the stock. And even though a same-store-sales growth rate of around 5% would be good, a return to that level from the current 11.1% rate would represent a roughly 50% decline in the same store sales trend. It is highly likely that 11.1% won’t hold for long, perhaps a couple of quarters at the most. And if the numbers fall back toward more normal levels, or, worse, the levels of industry peers, Wall Street might get spooked. If that were to happen, the stock would likely fall out of favor, even more than it currently has.
Chipotle is a strong brand, but know what you are buying
There’s no question that the Chipotle concept is strong; the same-store sales results are the evidence for that. And there’s still ongoing growth as it opens new locations. For long-term growth investors, the company remains interesting. But given the incredibly strong same-store-sales figures, investors should probably get ready for a slowdown at Chipotle. That could open up an even better buying opportunity for long-term investors to buy the stock, but if you own the stock such an outcome could materially test your resolve. Just remember that low- to mid-single-digit same-store sales is good in the restaurant space, particularly if the company is still opening new locations, as Chipotle is doing.
Unless you are a more aggressive investor, if you don’t own Chipotle stock you might want to wait for now. If you’ve owned it for a while, you’ll have a more difficult choice. The company is still performing well and you should probably ride out any turbulence in the stock’s performance, and the business’s performance, so long as management continues to execute well.