Chipotle Mexican Grill's Next Earnings Report on July 29 Could Send the Stock Sliding. Here's Why.

Chipotle Mexican Grill (NYSE: CMG) has been a top-performing stock throughout its history, but more recently, the company has disappointed investors.

The stock is down more than 50% from its peak a few years ago, as it lost star CEO Brian Niccol, same-store sales growth slowed, and its premium valuation compressed as investors dialed back estimates for its long-term growth.

Chipotle is down 10% year-to-date, as its results have underwhelmed. In the first quarter, comparable sales rose 0.5%. In comparison, margins fell sharply with its operating margin declining from 16.7% to 12.9% due in part to its biennial All Managers Conference and higher labor costs from labor inflation.

So what should investors expect when Chipotle reports second-quarter earnings? Let’s take a closer look.

Image source: Chipotle.

Can Chipotle bounce back?

Chipotle’s same-store sales in the first quarter were its best performance in at least five quarters, showing the company’s challenges aren’t new. During that time, average restaurant sales declined each quarter, reaching $3.09 million in the first quarter.

Chipotle has struggled for many of the same reasons as its peers. Inflation has pinched consumers, and the company has seen a fall-off in the most economically sensitive customers, including lower-income customers and young adults. Like other fast-casual chains, Chipotle is dealing with the perception that its prices are too high, and it’s also faced stiffer competition from sit-down casual dining chains like Chili’s.

The war in Iran has pushed inflation higher in the second quarter, meaning Chipotle is unlikely to get any relief from discretionary spending at the macro level.

There are some reasons for Chipotle investors to be optimistic. According to data from Placer.ai, a location intelligence platform that tracks store traffic, Chipotle posted positive same-store traffic in every month of the second quarter, averaging about 1% growth.

The collapse in the stock over the last few years also means it is much more reasonably priced than it once was, trading at a price-to-earnings ratio of about 30, about even with the S&P 500. That’s not a great price for a company struggling to grow on the bottom line, but it also means the stock should be stable unless its sales growth turns meaningfully negative.

The company also relaunched its rewards program, adding perks like monthly free food drops and making it easier to redeem points. Sign-ups spiked when the company announced the program.

What to expect from the Q2 report

Based on the impact of the new loyalty program and Placer.ai data, I think Chipotle is set for same-store sales growth. However, inflation and the loyalty program are likely to continue to pressure the bottom line, and that is what investors are most judging the company on at this point.

In fact, the analyst consensus calls for earnings per share to edge down from $0.33 to $0.32. Given that, I think investors will have to be patient with a Chipotle comeback. If profits fall again, the stock is likely to sell off. Chipotle remains a show-me story at this point. Management will have to show that it has overcome the challenges of the last few years.

Jeremy Bowman has positions in Chipotle Mexican Grill. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short September 2026 $35 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.