Chipotle's Mixed Q4: Sales Slowdown and Tariff Concerns Cloud Stock's Future

Chipotle Mexican Grill (CMG) shares took a hit Wednesday, a day after the fast-casual restaurant chain reported mixed fourth-quarter results and tried to downplay concerns about potential U.S. tariffs. The Mexican fast-casual restaurant chain's sales got a boost from the addition of 119 new locations in the quarter, but investors were unimpressed with the company's revenue and same-store sales estimates, as well as the potential impact of tariffs on its cost of sales.

Chipotle reported fourth-quarter revenue rose 13% to $2.85 billion, a tick below Visible Alpha estimates. Comparable restaurant sales growth of 5.4% was also less than expected. Adjusted earnings per share (EPS) came in at $0.25, in line with forecasts. The company explained that the revenue gains came through the addition of 119 new restaurants, helping increase transactions by 4.0%. Chipotle also had a 1.4% rise in average check.



Chipotle sees full-year comparable restaurant sales to be in the low- to mid-single-digit range, while the Visible Alpha estimate was for 3.76%. CFO Adam Rymer said on the earnings call that the company anticipates 2025 cost of sales "to be in the high 29% range" because of higher prices for food, especially avocados and chicken, according to a transcript provided by AlphaSense. Rymer added that if the proposed 25% tariffs on goods from Mexico and Canada and a 10% levy on imports from China are implemented, "it would have an ongoing impact of about 60 basis points on our cost of sales."

Rymer said the outlook doesn't take into account the potential tariffs. However, he noted that Chipotle only "sourced about 2% of our sales from Mexico, which includes avocados, tomatoes, limes and peppers. And less than 0.5% of our sales from Canada and China." Despite today's decline of more than 2%, Chipotle Mexican Grill shares are up about 17% in the last year.

Chipotle's recent sales slowdown can be attributed to several primary factors:

1. Higher Food and Packaging Costs: Chipotle's food, beverage, and packaging costs increased to 30.4% of total revenue in the fourth quarter of 2024, up from 29.7% in the previous year. This increase was primarily due to higher usage of ingredients as we focused on ensuring consistent and generous portions, a protein mix shift from the success of their Smoked Brisket limited time offer, and to a lesser extent, inflation across several items including higher avocado and dairy costs. To address this, Chipotle could focus on optimizing their ingredient usage, negotiating better prices with suppliers, and implementing menu price increases to offset these costs.
2. Labor Costs: Labor costs increased slightly to 25.2% of total revenue in the fourth quarter of 2024. Wage inflation, including minimum wage increases for their restaurants in California, was mostly offset by the benefit from sales leverage. To manage labor costs, Chipotle could explore automation and technology solutions to improve efficiency, as well as optimizing their labor scheduling and training programs.
3. General and Administrative Expenses: General and administrative expenses for the fourth quarter of 2024 were $191.2 million, compared to $169.2 million in the fourth quarter of 2023. The increase was primarily due to stock-based compensation, employee wages, and legal reserves. To control these expenses, Chipotle could focus on cost-cutting measures, such as reducing legal reserves and optimizing employee compensation packages.
4. Tariff Concerns: Chipotle's CFO, Adam Rymer, mentioned that if the proposed 25% tariffs on goods from Mexico and Canada and a 10% levy on imports from China are implemented, it would have an ongoing impact of about 60 basis points on their cost of sales. To mitigate this risk, Chipotle could diversify their supply chain, source more ingredients locally, and lobby against the implementation of these tariffs.

By addressing these factors, Chipotle can work towards restoring growth and maintaining their competitive edge in the restaurant industry. However, investors remain cautious about the company's ability to navigate the challenges ahead, particularly in the face of potential tariffs and rising costs.