Chipotle Mexican Grill CMG has had a rough start to 2025, with its stock struggling to gain traction. In the year-to-date period, the company’s share price performance has tumbled 17.8% against the Zacks Retail-Restaurant industry’s 1.5% growth. CMG stock has underperformed the broader Zacks Retail-Wholesale sector and the S&P 500 index as well. The detailed price performance is shown in the chart below.

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The muted same-store sales guidance for 2025 compared with last year, coupled with the expected margin pressures due to the newly levied tariff, especially in Mexico, and elevated operating expense expectations by the company, are inducing concerns among the investors in the market. Although certain tailwinds in the form of new menu additions and the focus on increasing digital penetration are somewhat supporting Chipotle’s business trends, the ongoing market uncertainties are weighing heavily on its profitability and near-term prospects.

The ongoing risks and expected margin pressures are taking a toll on Chipotle’s prospects, which is even reflected in its stock performance compared with some of the well-known industry players. CMG stock has significantly underperformed a few of its peers, including BJ's Restaurants, Inc. BJRI, McDonald's Corporation MCD and Darden Restaurants, Inc. DRI, year to date. During the said time frame, BJRI, MCD and DRI have gained 1.3%, 5.9% and 11%, respectively.

Headwinds to Chipotle’s Prospects

CMG is a quick-casual and fresh Mexican food restaurant chain, operating about 3,644 restaurants across the United States, Canada, the United Kingdom, France, Germany and Kuwait. Given the nature of its menu preparation, it mainly depends on sourcing good quality avocados, followed by tomatoes, limes and peppers. Notably, Chipotle sources about 50% of its avocados from Mexico, along with other related products used in Mexican cuisine, which is roughly 2% of its sales. Also, it sources nearly 0.5% of its sales from Canada and China.

After knowing the numbers, it can be deduced that the newly levied 25% tariff on Mexico and Canada, along with a 20% tariff on China, is expected to pressure the margins of the company in the near term, as it highlighted absorbing the potential cost increases. CMG stated that it had taken such a stance because of the uncertainty surrounding these tariff implementations having an effect on its business in the upcoming quarters. The consumer prices will be stable (or unchanged) until the tariffs start becoming a significant headwind for Chipotle’s profitability. In its last earnings call, the company stated that the full effect of the tariffs is expected to have a 60-basis-point impact on its 2025 cost of sales.

Furthermore, CMG also stated that excluding the impact of the tariffs, normalization of avocado prices, mixed impact from LTOs and the portion investment, its cost of sales for 2025 and the first quarter is expected to be in the low single-digit range. Besides, for the first quarter of 2025, it expects labor costs to be in the high 24% range, with wage inflation in the mid-single-digit range, which will then move down to the low single-digit range in 2025. All these inflated cost scenarios, along with the adverse impacts expected from the new tariff regime, are dimming the expectations of the investors and their actions in favor of CMG stock.

Adding fuel to the fire is Chipotle’s reduced same-store expectations for 2025. For the year, it expects the metric to grow between low and mid-single digits compared with 7.4% growth in 2024.

Estimate Trend of Chipotle

The ongoing macro headwinds and new tariff implementations are inducing concerns among analysts. The impact of the headwinds can be witnessed from the earnings estimate trend for 2025, which has moved south 0.8% in the past 30 days. Although earnings estimates reflect year-over-year growth of 14.3% in 2025 and 3.7% in the first quarter, the downward revision indicates the dropping market expectation for the stock.

Earnings Estimate Revision

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CMG Trading Below 50 & 200-Day Moving Average

Technical indicators suggest declining performance for Chipotle. From the graphical representation given below, it can be observed that CMG stock is trading below its 50-day simple moving average (SMA) and 200-day SMA, signaling a dismal trend. The technical frailty underscores declining market sentiments.

50 & 200-Day SMA

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CMG Trading at a Premium

Chipotle is currently trading at a premium compared with the industry peers on a forward 12-month price-to-earnings (P/E) ratio basis. The premium valuation indicates that the stock is trading above its industry peers, making it difficult for investors to figure out a suitable entry point.

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Thoughts on Investment

As discussed above, the ongoing regulatory uncertainties surrounding tariff implementations are likely to hurt Chipotle in the near term, given that Mexico, Canada and China are its key supply markets. Besides this, the expected wage inflation, increasing marketing costs and an overall elevated operating expense structure add to the headwinds. CMG stock’s performance is being adversely impacted by the combined effect of the ongoing market risks.

Moreover, the headwinds mentioned above are weighing heavily on the company’s in-house strategy execution, reducing its operating efficiencies and increasing its costs and expenses.

Thus, based on the detailed discussion and the trends of the technical indicators, it is prudent for the existing investors to shake off this Zacks Rank #4 (Sell) stock from their portfolio until the market trends, coupled with its in-house capabilities, move in favor of the stock.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Chipotle Mexican Grill, Inc. (CMG) : Free Stock Analysis Report

Darden Restaurants, Inc. (DRI) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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