Chipotle saw earnings increase 32% in the second quarter — but it has sputtered since the big stock split.
Chipotle Mexican Grill (NYSE:CMG) stock was moving lower on Thursday even though the fast food chain posted second quarter earnings that topped analysts’ estimates.
Chipotle’s revenue rose 18% to $3 billion in the quarter, ahead of the $2.94 billion estimate. Net income climbed 14% year-over-year to $815 million while earnings per share rose 32% to 33 cents per share, beating estimates of 32 cents per share.
The stock price initially skyrocketed 10% when earnings were released after the market closed on Wednesday. But the stock price started falling in pre-market trading Thursday and was down about 4% after the market opened to $50 per share.
Earnings fueled by new restaurants, rise in same-store sales
The initial upward after-hours price movement was fueled by the solid earnings beat. The restaurant chain’s top line surge was driven by the opening of 52 new restaurants in the second quarter, including 46 with a drive-through Chipotlane.
Revenue also spiked due to 11% increase in same-store sales, buoyed by an 8.7% jump in the number of transactions, which is the number of customers in its restaurants. Chipotle also saw a 2.4% increase in the average check, indicating people are paying more for the food.
Same-store sales growth was significantly higher in Q2 than it was in Q1, when they rose 7%, and Q4 2023, when they increased 8.4%.
Further, food, beverage and packaging costs, which is essentially the cost of producing the meals, was 29.4% of total revenue, the same as the second quarter of 2023. Also, general and administrative expenses rose 11% year-over-year to $175 million
The overall operating margin increased to 19.2%, from 17.2% in the same quarter a year ago, while the operating margin at the restaurant level climbed to 28.9%, from 27.5% in Q2 of 2023.
“The second quarter was outstanding as successful brand marketing, including the return of Chicken Al Pastor, drove strong demand to our restaurants,” Brian Niccol, chairman and CEO at Chipotle, said. “Our focus and training around throughput paid off as we were able to meet the stronger demand trends with terrific service and speed driving over 8% transaction growth in the quarter.”
What caused Chipotle stock to move?
The sharp decline in Chipotle stock likely may, in part, be due to its outlook, which stayed the same for fiscal 2024. Chipotle is calling for comparable same-store sales growth for the fiscal year to be in the mid-to-high single-digit range. The projected number of new restaurants is also the same as past guidance.
The outlook would be a little slower than Q2 same-store growth, but then again, this quarter, the numbers were higher-than-expected. There could also be concerns related to projections for an overall slowdown in fast food sales. But Chipotle has proven to be an outlier, generating strong traffic while others have struggled.
It likely had more to do with Chipotle’s valuation. The market seems to be in a correction for stocks with high valuations, and Chipotle would qualify, especially after spiking 10% post-earnings.
Chipotle stock has been a juggernaut, rising 65% in 2023 and another 11% so far this year. Its stock price soared to over $3,000 per share before a massive 50-for-one stock split kicked in in late June. Now it is trading at a more accessible $50 per share.
But Chipotle’s stock price has corrected since that June 26 stock split, down some 24% from $65 per share. As a result, the P/E ratio has come down to 50, from 65 in April. That is still high, so there could be farther to fall.
Is Chipotle stock a buy?
There doesn’t appear to be any fundamental issues with Chipotle, in fact it is growing rapidly. Debt has risen a bit in this growth period for Chipotle, so that bears watching, but overall, it has been performing well.
The price correction is probably a good thing for new investors in Chipotle stock. Chipotle has a median target of $65, which would essentially gain back what it lost over the past three weeks.
So, watch the valuation, as it could dip a bit further. But overall, Chipotle stock looks like one to put on your radar due to its rapid growth, particularly if the P/E drops a little lower.
