shares Chipotle Mexican Grill (NYSE: CMG) It pulled back after its third-quarter earnings report, reversing the recent momentum the stock had seen this fall. The drop in price was due to sales being well below analysts’ expectations.

The popular Mexican restaurant chain is currently in the midst of a transition period after its CEO left to take over. Starbucks. The company is also dealing with the fallout of having to retrain about 10% of its locations to serve accurate, larger portion sizes after viral videos and analyst surveys showed some restaurants were skimping on portion sizes.

Let’s examine Chipotle’s recent earnings to see whether investors should buy the dip.

Sales occurred in a short time

By all accounts, Chipotle had solid results, but its sales fell slightly short of expectations. Its revenue rose 13% to $2.78 billion in the quarter; This was well below analysts’ consensus of $2.82 billion. Comparable restaurant sales It increased by 6%, below the 6.4% increase that analysts expected.

Transactions increased 3.3%, while the average check increased 2.7%. The company said it expects only a 1% increase in the check in the fourth quarter after the price increase in October. However, it seems that traffic has increased in recent months. Same-store sales in September were in the mid-7 percent range, he said, with about 4 percent of that coming from increased transactions. This transaction growth continued in October.

Adjusted earnings per share (EPS) rose 17.4% to $0.27, beating analysts’ estimates of $0.25. Cost of sales for the quarter increased from 29.7% to 30.6%. The company said the increased menu prices were offset by increased avocado prices, larger portion sizes and higher costs of breast meat LTO (limited time offer). It said its cost of sales will be over 31% in Q4 due to having smoked brisket on its menu throughout the quarter.

Labor costs as a percentage of sales were 24.9%, the same as last year. For Q4, this metric is expected to rise to the low 25% range due to seasonally low sales.

Meanwhile, profit margin at the restaurant level was 25.5%, down from 26.3% a year ago and 28.9% in the second quarter. The company warned last quarter that this metric, which measures restaurant profitability at the individual level, would be affected by increased portions at locations that underserved customers. It continues to improve this metric through efficiency and innovation in the coming quarters.

The company opened 86 new locations this quarter and expects to open between 285 and 315 new company-owned locations this year and 315 to 345 next year.

Chipotle increased its repurchases during the quarter, repurchasing $488.1 million worth of shares at an average price of $54.55. It bought back shares worth $25 million in the first quarter and $151.4 million in the second quarter.

Image source: Getty Images.

Should investors buy the dip?

There was nothing in Chipotle’s third-quarter results that changed the stock’s long-term trajectory. Although sales fell slightly below expectations, traffic increased as the quarter progressed and into October, indicating the brand’s continued strength. While larger portion sizes will expectedly negatively impact margins at the restaurant level, correcting this issue and making portions more uniform across locations will go a long way in improving the customer experience, which will be a positive development in the long run.

Meanwhile, the company’s expansion story is on track and will add more locations in 2025 than in 2024. The company said it feels comfortable growing its restaurant base by 8% to 10% per year going forward. Seeing Europe as a great opportunity, it begins to look towards further expansion internationally. It will also open another restaurant in the Middle East in early 2025, in partnership with Alshaya Group, and sees growth opportunity in the region.

Although former CEO Brian Niccol has left, that doesn’t mean the company has stopped innovating to improve efficiency. This includes a double-sided plancha and produce slicer to help improve prep time and cooking processes, as well as a new AI-powered recruiting platform to help improve staffing.

From a valuation perspective, the stock is trading at a certain level. forward price-earnings (P/E) Multiples of those under 43, according to 2025 projections. In the past, the company traded at a P/E ratio of 50 or higher.

CMG PE Ratio (Forward 1y) data YCharts.

Despite the recent pullback in Chipotle shares, the company’s recipe for success remains unchanged and shares are trading within their historical ranges. The company still has a long growth trajectory, opening new locations both in the US and internationally. Meanwhile, customers continue to love their food, as evidenced by continued increases in traffic. I think the stock will continue to be a winner in the long run. restaurant area.

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Geoffrey Seiler It has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: Short December 2024 $54 off Chipotle Mexican Grill. The Motley Fool has a feature disclosure policy.