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After a rough year for the stock, the latest quarterly update from Chipotle pushed shares even lower. As of this writing, the market has knocked Chipotle Mexican Grill (CMG +0.75%) down more than 20% since its Oct. 29 report, and the year-to-date return sits deep in the red, with shares down nearly 50%. The move comes as management lowered its already disappointing full-year outlook for comparable-restaurant sales, putting the forecast in negative territory. As far as the top line goes for Q3, the fast-casual restaurant operator did post growth. But it was the composition of that growth -- and the guidance -- that ultimately spooked investors. A challenging backdrop At first glance, Chipotle's performance doesn't look too bad. Its third-quarter revenue rose 7.5% to $3 billion. But that's where the good news ends. Dig deeper and you quickly discover a challenging backdrop.Comparable restaurant sales increased just 0.3%, driven by a 1.1% increase in average check that offset, in part, by a 0.8% decline in transactions. With restaurant-level sales suffering, it's not surprising to see that restaurant-level operating margin slipped, too. The key profitability metric narrowed to 24.5% from 25.5% in the year-ago quarter, and companywide operating margin fell to 15.9% from 16.9%. Management's comments in the third-quarter earnings release captured the backdrop -- and the plan to address it."While we continue to see persistent macroeconomic pressures, our extraordinary value proposition and brand strength remain strong," Chipotle CEO Scott Boatwright said, adding that the company is "doubling down on restaurant execution, sharpening our marketing message, accelerating menu innovation and creating more engaging digital experiences to ensure we emerge stronger and get back to driving positive transaction growth." But any efforts from Chipotle to revitalize its growth story are clearly going to take time, because it lowered its full-year guidance for comparable restaurant sales. For 2025, Chipotle now expects comparable sales declines in the low-single-digit range, a meaningful cut from prior expectations for "about flat." In its third-quarter earnings call, management cited a number of headwinds it is facing, including declining consumer sentiment from younger and low- to middle-income guests. These factors were accompanied by inflation, tariffs, and rising beef costs that continue to weigh on margins. Some positives Even as comparable restaurant sales cooled, Chipotle's growth algorithm isn't standing still. The company opened 84 company-owned restaurants in the quarter (64 with Chipotlanes) and two international partner locations, helping explain the company's meaningful revenue growth for the period despite traffic trends moving in the wrong direction. For 2026, Chipotle plans 350 to 370 openings, with more than 80% of company-owned units including a Chipotlane -- a proven sales and margin lever. But traffic matters. Three straight quarters of negative traffic changes the risk profile because the model works best when price and throughput move together. The latest quarter's 0.8% traffic decline, paired with a 1.1% increase in transaction size, isn't a disaster -- yet it limits operating leverage, as seen in Chipotle's margin compression. Valuation still looks demanding After the sell-off, Chipotle trades at around 28 times earnings -- a steep premium when management is guiding to a decline in comparable sales and seeing margins compress. Could sentiment flip quickly if transactions turn up? Absolutely. Chipotlanes remain a tailwind for the business, digital engagement remains high, and the pipeline for 2026 new restaurant openings is robust. But those positives need to show up in steady traffic and rebuilding margins before today's multiple looks attractive. For now, the risk-reward skews cautious. A great brand can be a subpar stock when expectations run ahead of fundamentals. The business may reaccelerate, but until traffic stabilizes and margins stabilize, the valuation may be asking for too much. Watching how the next few quarters pan out looks more prudent than rushing in after the drop.
