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Beware Chipolle's Dwindling Comps

Picture of Chipotle Sign

Chipotle (CMG) continues to have visions of aggressive growth! This year the company plans to open between 160 to 180 new restaurants.

Expansion is always good for franchise and investors like when they see this, but the company has been struggling with margins and I have to ask whether or not the aggressive growth strategy is good right now or if the company should slow down and spend more time on current operations.

Even its parent company, McDonald’s (MCD), had to admit that the cost of food production is rising too fast and at a certain point it doesn’t make sense to sell a product keeps going up in price and cutting into the company’s margins.

It’s 1/3 pound Angus burger will be removed from the menu because the cost of beef continues to rise. Chipolte's menu is already more expensive than McDonald’s, how long can it continue at this pace?

As an investor I would be concerned about Chipotle’s margins considering they continue to go up in price.

The restaurant has been underperforming in areas that count, namely first-year stores. Tracking this is known as comps, and two years ago at posted 11.1% far greater than its rivals.

But since that time they have been decreasing. The second quarter of 2012 it was only 8% in the third quarter dropped the 4.8%. This quarter they dropped 1%.

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Stock Tickers: CMG MCD Author Disclosure: At the time of publication John did not hold any stock in the companies mentioned in this article.
www.optionstradingwithjohn.com

Good post, John. I agree with you 100%. At some point, the rising cost of food and management's aggressive growth strategy are going to collide. 

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