Shares of popular restaurant chain Chipotle Mexican Grill(NYSE: CMG) fell on Wednesday after the company reported financial results for the third quarter of 2024. While financial results were strong, analysts seemed skeptical about the business looking forward. As of 11:30 a.m. ET, Chipotle stock was down almost 7%.
A good quarter but investors are worried
In Q3, Chipotle's business was booming. Same-store sales jumped by 6% year over year, helped by transaction growth of 3%. Coupled with opening new locations, overall revenue was up 13% to $2.8 billion. And the growth bolstered the bottom line as well, with adjusted earnings per share increasing by 17%.
These are strong numbers. However, analysts had lots of questions for Chipotle's management in the Q3 earnings call. Questions centered on the pace of new restaurant openings, operations at new locations, and ongoing inflation. In short, investors seem to wonder whether the company's growth is slowing and profit margins are about to take a larger hit.
In summary, Chipotle's Q3 report was basically what investors had expected and the guidance was little improved. So there was little reason for the stock to rise. And with investors now perceiving clouds on the horizon, Chipotle stock had reason to fall.
What should investors do now?
I think concerns over Chipotle's business operations are overblown. It's true that its restaurant-level operating margin dropped from 26.3% last year to 25.5% in Q3. But that's still a stellar profit margin.
Moreover, Chipotle's management believes it's making choices to support average sales volume of $4 million annually at each restaurant along with 30% operating margins. Hitting those numbers would be an extraordinary accomplishment, but it's realistic given where Chipotle is now and its history of strong operations.
That said, Chipotle stock isn't cheap even after today's pullback. Therefore, if investors want to own shares of a top operator, then Chipotle is still the stock to buy in the restaurant space. But for investors looking for a bargain, they may need to keep waiting for this one.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
