Chipotle Mexican Grill, Inc. (CMG): 3 Images That Will Shock You

Chipotle Mexican Grill, Inc. (NYSE:CMG) was once the toast of Wall Street boasting a great growth story, good food, and happy customers.

But the company’s recent financial results have exposed cracks in bull thesis. Here are three holes in the Chipotle story.

Weak same store sales growth

Chipotle Mexican Grill, Inc. (NYSE:CMG)’s recent operating results have been disappointing. Last quarter, the company grinded out a measly 1% increase in comparable same store sales. That’s startling because investors have grown accustomed to double-digit comp growth. Ouch!

So what’s cause this decline?

Yum! Brands, Inc. (NYSE:YUM) is starting to copy Chipotle Mexican Grill, Inc. (NYSE:CMG)’s profitable formula. Last fall the company’s Taco Bell chain introduced its Cantina menu, which features premium burritos with black beans, cilantro rice and marinated chicken or beef for under $5.

Initially Chipotle Mexican Grill, Inc. (NYSE:CMG) bulls didn’t consider Cantina a real threat because of different target demographics, lower product quality, and different geographies. But this assumption is starting to be proven wrong. During the first quarter, Taco Bell reported impressive 6% same store sales growth in the United States.

But my biggest concern: stale menu. With a limited number of menu items could customers be getting tired of Chipotle? This wouldn’t be the first fad in restaurant history.

Margin pressure

Chipotle Mexican Grill, Inc. (NYSE:CMG)’s margins are being hampered by inflation. During the last quarter, management reported higher prices for streak, barbacoa, dairy goods, and salsa ingredients.

Last quarter the company raised menu prices in a attempt to pass on higher raw costs. But the fact that same store sales flat-lined during the same time frame may reveal the company’s fragile moat. Does Chipotle Mexican Grill, Inc. (NYSE:CMG) have the ability to raise prices? Apparently yes, but not without losing customers.

This valuation doesn’t make sense

Single-digit same store sales and margin contraction isn’t necessarily a big problem if Chipotle is trading at a reasonable valuation. But that’s not the case with this stock.