Food, beverage and packaging (FBP) costs were 29.2% of sales vs. 30.4% Q/Q and 28.8% Y/Y. Larger portion investments offset price hikes. It sees FBP costs rising to 30% of sales due to normalizing avocado prices next quarter.

Labor costs were 25% of revenue vs. 24.4% Y/Y due to lower fixed cost leverage and wage inflation. It will lap the 20% wage hike in California next quarter and labor cost is expected to fall to 24.5% of revenue.

Chipotle lowered low to mid-single-digit comparable restaurant sales guidance for 2025 to low single digits. Analysts were looking for 3% growth guidance. Guidance offered last quarter did not include the impact of tariffs, and this updated guidance does. For the tariff demand impact, Chipotle observed heightened consumer anxiety and some pockets of spending weakness stemming from it. They have baked this into the new guidance to de-risk 2025 forecasts. On the tariff margin side, about 2% of its total food costs come from Mexico, while they source some beef from Canada and other supplies from Australia, New Zealand and Uruguay. They also source aluminum packaging from other countries. As a reminder, Chipotle is absorbing these added costs and will take a 50 bps restaurant-level margin hit because of them. It has the luxury of flexing its margin and balance sheet muscles to create a more compelling relative value prop vs. the competition during these chaotic times. It’s the right decision.

It also reiterated plans for 330 new stores this year. This represents 9% Y/Y store growth. Analysts were looking for 11% Y/Y revenue growth for the year after some modest estimate declines. If we assume low single-digit comparable restaurant sales growth means 2% (reasonable I think) then this roughly met estimates. At the same time, consensus growth estimates fell to 9% Y/Y following the report, so this can be taken as a modest miss.

EPS is expected to grow by 9% this year and by 20% next year.

Shape of Comparable Store Sales & Restaurant Level Margin for 2025 – Many Puts & Takes:

There’s a lot to unpack for comparable store sales & RLM for 2025. First, let's start with what was known and baked into margin expectations as of the Q4 call. Last year, Chipotle had fantastically successful protein launches (Chicken Al Pastor was a massive winner), which helped fixed cost leverage. It also invested in larger portions in response to consumer pushback. We’re lapping that chicken strength and still comping vs. pre-portion boosts. The portion investment specifically was expected to reduce 2025 RLM by 60 bps, with the impact most severe during Q1 and Q2. That’s mainly why RLM fell 130 bps Y/Y this quarter. Plans in place to offset this headwind by the end of 2025 are multi-pronged and working. They’ve already clawed back more than half of this lost margin. Its (avocado peeler and de-seeder), produce slicers, upgraded dual-sided grills, 3 pan rice cookers (prep it right from the make line) and new chip fryers all worked in test stores and will be implemented across all new openings going forward. They’re all diminishing tedious labor requirements and even allowing Chipotle to shift some talent to the front lines to improve throughput even more. Beyond this, it modernized back-of-house workflows and made meal prep timing more concrete and organized. All of this is why RLM is expected to be higher during the second half of the year.

Now for what was known on the demand side of things during the Q4 call. A combination of weather, LA Wildfires and later return to work/school shaved 4 points off of comparable sales trends to start 2025. Last quarter we were told transaction growth for January was -2% Y/Y as a result. Furthermore, a 1-point leap year headwind added to Q1 softness. This is why it expected 0% Y/Y transaction growth for Q1 and improving trends thereafter. But wait, there’s more.

In terms of unknowns, the aforementioned tariff impact is expected to hit RLM by another 50 bps this year, while associated consumer softness yielded the comparable store sales miss. That’s certainly not the only headwind (we’ve covered the others) but it is absolutely contributing. Weakness continued through Q1 and was related to heightened consumer anxiety based on extensive surveying. Honey chicken helped a ton to weather some, but not all of this volatility. Chipotle has to roll with these punches, but the degree of impact is now known and can quickly diminish with positive trade war developments.

“While we can't predict how long these consumer headwinds will last, what I do know is that the Chipotle brand has never been stronger, that we have an extraordinary value proposition that is more important than ever to focus on being guest obsessed to earn every transaction.”

CEO Scott Boatwright

More on Trends From Q2-24:

More comp items to note. Q2 will also include comping over its fastest same-store sales growth of 2024, while a 1-point impact from Easter merely joins all of the other headwinds. This makes it very clear why both demand and margins are expected to improve during Q3 and Q4. And while Q2 will face all of these challenges, things are already improving a bit. 2-year comparable sales blended growth accelerated from 7% Y/Y during Q1 to 8% Y/Y during April. Again, honey chicken helped, as it enjoyed its highest order mix out of any limited time offer to date. This is a winner and it does expect that specific momentum to keep building throughout Q2. By Q3, they expect transaction growth to turn positive once more. That’s despite the series of unknown headwinds proliferating since the last time Chipotle told us to expect.

Run Great Stores – Affordability:

Like Cava, Chipotle is leaning into affordability during these unnerving times. The company gets a lot of blowback for its expensive prices, but that’s becoming increasingly unwarranted. The average cost of its highest-volume bowl is about 25% cheaper than “comparable fast casual meals,” while it leads in important brand tracker categories like good value.

Run Great Stores – Throughput:

Chipotle continued to build on throughput gains after meeting internal goals last quarter. Several of its sub-regions now have “expos” in 80% of their stores. These team members function as a bridge between food prep and checkout and routinely raise throughput everywhere they’re implemented. Stores without these team members routinely fall behind on prepping fresh food and meeting peak demand. Expos help a ton and Chipotle wants them in every store.

Aside from expos, all of the aforementioned new equipment testing is expected to help throughput more. Its new grill, rice cooker and chip fryers are all ready for accelerated rollout. They’ll be in all new stores by Q4, as it also starts retrofitting existing locations. The produce slicer is also a clear winner for cutting tedious prep time. It will be in all stores by this summer. That will expedite order fulfillment and improve product consistency. For the autocado and revamped digital make-line, it is still tinkering with both before it gains needed confidence to rev those throughout engines.

Run Great Stores – Hospitality:

While Chipotle continues to execute very well amid a tough backdrop, there’s one area it thinks it can more quickly improve within the objective of running a great store. That’s hospitality. It has good food… with good ingredients… (now) good portions... at an affordable price… all conveniently & quickly secured. Now it wants to create a warmer ambiance. I will say a lot of these new initiatives closely mirror what Cava is doing and I don’t think that’s a coincidence. For hospitality, Chipotle wants its employees to smile more and get more friendly. Simple enough… and a proven way to improve guest service scores. Its restaurant managers are in the process of making this a more primary focus in all of its stores.

How Do We Know this is Macro & Not Competition?

“What gives us confidence is when we have competition that opens near us, we so no material impact. In most cases, we see an increase in traffic. As we look at our data, we continue to gain share across all restaurants, both QSR and fast casual.”

CEO Scott Boatwright

Digital Trends:

The relative weakness in its digital channels is based mainly on white label marketplaces and delivery partners. Its app is doing consistently fine.

Marketing:

Chipotle said it was going to lean more into marketing, but marketing as % of sales is expected to stay below 3% this year. I think it means it will shift some spend to its digital and social channels while making targeted placements in its app more of a focus. Furthermore, they plan to make catering a bigger priority. It’s only 1.5% of total sales with zero marketing to date, and Chipotle is forming a plan to accelerate this growth driver (just like Cava – noticing a theme?).

Going Global:

New store openings this year will include 15-20 in Canada, which will be a record. It plans to keep the pedal to the metal on store openings everywhere, as cash-on-cash location returns for its year-two stores remain at a sky-high 60%. This is down from a projected 65% due to tariffs, but is still elite. It added 2 more stores in the Middle East with its partner (Al Shaya) to reach 5 total. These are all doing great. It also announced a new partnership with Alseia in Mexico to open stores there next year (and perhaps other countries in LatAm). Selling Americanized Mexican food in Mexico sounds tough, but Taco Bell does very well there.

In Europe, RLM continues to trend higher and give the team more confidence in this being a strong growth market going forward. They’ve added Germany to their list of development markets.

Not a great quarter, as expected. They’re at the forefront of feeling consumer anxiety amid all of the trade tensions. I’m confident that when we finish this earnings season, they will look like the relative outperformer as they keep taking market share. They are perfectly poised to find a great acceleration as the backdrop brightens, with a new team in place that has deep, direct experience to mimic the fantastic success of the old team. The margin ceiling keeps rising and comparable store sales headwinds are all either exogenous or highly temporary. If we didn’t get such positive trade news this week, I think it’s possible this report could have been more materially punished. Candidly, I was hoping for that. As Max readers know, this is my newest position and I’d love to own more of it if we see more multiple contraction.