Chipotle Stock Slips on Soft Sales, Potential Impact of Threatened Tariffs

Chipotle Mexican Grill (CMG) shares took a tumble on Wednesday, a day after the fast-casual restaurant chain reported mixed quarterly results. While earnings beat expectations, revenue fell short, and the company tried to address investor concerns about potential tariffs on imports from Mexico. Let's dive into the details and explore the potential impact of these tariffs on Chipotle's supply chain and ingredient sourcing.

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.

However, 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. 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 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.



The potential impact of tariffs on Chipotle's supply chain and ingredient sourcing could be significant. If the proposed tariffs are implemented, the company may face increased costs for key ingredients like avocados, chicken, and other produce. This could lead to menu price increases, which could in turn impact customer demand. Chipotle has demonstrated pricing power in the past, but it must be cautious about raising prices too frequently to avoid alienating customers.

To mitigate the effects of tariffs, Chipotle could consider several strategies:

1. Diversify Sourcing: Chipotle could explore sourcing more ingredients from other countries to reduce its reliance on Mexican avocados and other produce. The company has already started shifting its avocado sourcing to other countries like Colombia, Peru, and the Dominican Republic.
2. Menu Changes: If certain ingredients become too expensive or difficult to source due to tariffs, Chipotle may need to consider menu changes or substitutions. For example, the company could introduce new menu items that rely less on affected ingredients or find alternative sources for those ingredients.
3. Investment in Back-of-House Equipment: Chipotle is investing in new equipment, such as produce slicers, dual-sided grills, and dual-vat fryers, to improve efficiency and throughput in its kitchens. These investments could help offset some of the increased costs associated with tariffs by reducing labor and other operational expenses.

In conclusion, Chipotle's stock slipped on soft sales and potential impact of threatened tariffs. While the company has demonstrated pricing power and menu strategy to mitigate potential cost increases from tariffs, the long-term effects on its supply chain and ingredient sourcing could be significant. Chipotle must adapt by diversifying its sourcing, considering menu changes, and investing in back-of-house equipment to maintain its competitive position in the face of economic uncertainty.