Chipotle Mexican Grill, Inc. CMG slipped 13.2% since it released its fourth-quarter 2024 results on Feb. 4, 2025. Although the recently reported quarter’s earnings topped the Zacks Consensus Estimate and grew year over year on rising top line, the hints of increased input costs moving into 2025 due to the recently talked about 25% tariff on Mexico are posing concerns among investors. Moreover, the company’s 2025 expectations of comparable restaurant sales growth between low to mid-single digits (compared with 7.4% growth in 2024) are being considered conservative based on the market’s expectations. (read more: Chipotle Q4 Earnings Top Estimates, Revenues Lag, Stock Slips 5%)

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Since the release of fourth-quarter results, CMG has underperformed the Zacks Retail-Restaurant industry, the broader Retail-Wholesale sector and the S&P 500 index. The detailed price performance is shown in the chart below.

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Understanding the Headwinds Posing Threats to Chipotle

As the company indulges mainly in Mexican food preparations, any hike in ingredient prices, primarily avocado, dairy and meat, is expected to directly pressure its margins and bottom line. During the fourth quarter of 2024, CMG’s food, beverage and packaging costs increased year over year by 15.9% to $866.3 million. As a percentage of total revenues, food, beverage and packaging costs rose to 30.4% from 29.7% reported a year ago. This notable hike was due to inflation across several items including higher avocado and dairy costs, accompanied by a protein mix shift from the success of the Smoked Brisket limited-time offer and higher usage of ingredients (as the company focused on offering consistent and generous portions).

Currently, under the new regulations of the United States, a 25% tariff is likely to be levied on imports from Mexico, which is immensely concerning for Chipotle’s business operations. The company’s food preparations mainly revolve around the usage of avocados followed by tomatoes, limes and peppers, and others. It sources about 50% of its avocados from Mexico, along with tomatoes, limes and peppers, which is roughly 2% of its sales. With the ongoing scenario, it can be expected that there will be a further rise in input prices throughout 2025 till the market gets adjusted to the new regime. This price hike is expected to adversely impact the margins and earnings per share of Chipotle in 2025.

Furthermore, the 25% tariff on Canadian imports and 10% tariff on China imports are also likely to add to these headwinds, given that the company engages in sourcing a few of its inputs from these two regions, summing up to approximately 0.5% of its sales. Chipotle expects this entire tariff scenario to have a 60-basis points impact on its 2025 cost of sales.

Chipotle’s Fundamentals Remain Strong

Being a renowned brand, Chipotle consistently aims to maintain its market share and cater to the growing demand trends. Through effective digital penetration, increased Chipotlane units and incremental marketing initiatives, the company is fostering its prospects despite the ongoing market uncertainties.

In 2024, Chipotle opened 304 new restaurants, with 257 locations having a Chipotlane. The company’s effective marketing strategies, focused on strengthening brand recognition and driving customer engagement, are likely to be aiding the unit growth globally. As of Dec. 31, 2024, Chipotle operated 85 international restaurants, including 55 in Canada, 27 in Europe and three in the Middle East. CMG expects to open approximately 315-345 new restaurants in 2025, with more than 80% of the new openings including a Chipotlane.

Moreover, since the roll out of the Smarter Pickup Times” technology, Chipotle has witnessed a significant increase in digital orders and guest satisfaction. In 2024, digital sales represented 35.1% of total food and beverage revenues. The improvement in guest access and convenience, as well as the contribution from Chipotlanes, has been proving well in increasing digital sales contribution.

In 2024, Chipotle’s marketing strategy focused on increasing brand visibility and customer engagement. A strong brand campaign and two limited-time offerings, Chicken Al Pastor and Brisket, drove higher transactions and spending. These efforts helped strengthen Chipotle’s position in key categories such as quality ingredients, value and nutrition. The company plans to build on this momentum in 2025 with continued marketing initiatives.

Estimate Trend of CMG

Backed by its in-house business initiatives mentioned above, despite the lingering macro headwinds and regulatory hurdles, the earnings estimate for 2025 indicates 15.2% year-over-year growth. Although the year’s estimate showcases a downward revision, the growth trend from 2024 induces optimistic sentiments among investors.

EPS Trend

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Notably, CMG’s 2025 estimated year-over-year earnings growth surpasses a few of the other market players, including BJ's Restaurants, Inc. BJRI, McDonald's Corporation MCD and Darden Restaurants, Inc. DRI. The earnings estimates for 2025 indicate a 11.6% year-over-year rise for BJRI and 4.5% for MCD. Fiscal 2025 earnings estimate for DRI reflects a 7.2% year-over-year rise.

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. On the other hand, the overvaluation indicates the strong potential of the stock in the market given the in-house efforts it is facilitating to foster business growth and ensure shareholder value.

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Chipotle’s ROE Trend

The company’s trailing 12-month return on equity (ROE) reflects its growth potential and focus on maintaining shareholder value. As evidenced by the chart below, CMG’s ROE is significantly better compared with the industry.

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How to Play CMG Stock?

As discussed above, the ongoing regulatory uncertainties surrounding tariff implementations are expected to hurt Chipotle, given Mexico, Canada and China are its key supply markets. Besides this, the ongoing inflationary pressures are continuing to mar the margins through elevated costs and expenses.

However, to counter these macro and regulatory hurdles, the company is continuously working on implementing several in-house initiatives to balance out the headwinds and foster its growth. The primary tailwinds of CMG are its global brand image and an effective marketing strategy. These factors, coupled with the demand trends for its diversified product offerings, are expected to neutralize the adverse impacts of the headwinds discussed above.

Thus, based on the detailed discussion, weighing both sides of the coin, it is prudent for existing investors to hold on to this Zacks Rank #3 (Hold) company’s shares for now, whereas new investors might want to wait for a more favorable entry point.

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

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

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