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Chipotle Can Not Afford Its Valuation

Recently Chipotle Mexican grill presented at ICR and updated investors on their progress and reframed their forecast. Chipotle stated that they see 2017 earnings coming in at around $10 per share with same store sales growing in the mid single digits. At its current price this puts the company at a forward P/E multiple of 41 times earnings. A high multiple is often associated with the expectation of growth, however with Chipotle investors are really paying for the illusion of growth.

When Chipotle explains its same store sales growth, it compares the sales from a given period this year to the sales from the same period last year. If we briefly look into Chipotle’s past we will remember that they were the subject of a massive decline in revenue due to poor food safety. The same store sales growth this year is really just an indication that the numbers are thankfully no longer declining. It means customers are beginning to come back to the restaurants, but not nearly at the rate needed to justify the multiple. It is not growth in the conventional way we think about it, but rather retracing ground that was already covered. The earnings estimate for 2017 is still less than the actual earnings for 2013.

The next illusion is found when we analyze where the year over year earnings growth is truly coming from for 2017 versus 2016. Chipotle stated that the earnings growth is partially driven by the cutback in marketing expenses that rose sharply to combat the negative publicity. On the positive side, cost cutting initiatives are also playing in to the earnings growth. Although these initiatives are healthy for the business they hide the fact that the growth is not coming from a more organic source.


Chipotle creates the illusion of growth by citing increased sales when compared to an extremely down period in the company’s history. Even though these growth numbers signal that customers are coming back, mid single digit growth means they are not coming back quickly enough. Earnings growth further complicates things when the pullback of marketing expenses are taken into account. The real growth behind the business is not enough to justify the current share price.

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