CMG
Chipotle Mexican Grill
FROM CHASE
US Consumer Discretionary Mid-Cap Event Short
INVESTMENT THESIS
I think the right way to underwrite this quarter is to keep the investment debate where it belongs: on transactions and four-wall economics rather than on the income-statement bottom line. The Street came into 3Q expecting comps to turn slightly positive—about +1.3% on LSEG data—after a bruising −4.0% in 2Q, with EPS roughly on the number. That left very little room for error on traffic in September and early October, precisely when category checks softened and the brand lapped a richer promotional/LTO calendar.
INVESTMENT DECISION
Summary
The catch is that Chipotle has been protecting restaurant-level margin by threading food cost efficiencies and disciplined labor scheduling; so while EPS can still land near consensus, the signal that moves the stock is the comp mix, not the penny count. With consensus SSS ahead of where the intra-quarter evidence pointed, and with known headwinds from beef/chicken inflation and newly enacted tariffs sitting in COGS, I see a clean, negative skew on the print: a modest SSS miss paired with a restaurant-level margin that biases to the low-25s, an "as-expected" EPS that offers no rescue, and a guide that needs to migrate down to reflect what has actually been happening in the dining room.
The earnings release is scheduled for (and now printed on) Wednesday, October 29, 2025, after market close.
Recent quarterly pattern
Stepping back, the last three quarters have already sketched the demand pattern we're handicapping. In 1Q25, revenue grew 6.4% to $2.9B but comps dipped −0.4%, with transactions −2.3% partially offset by +1.9% average check; restaurant-level margin (RLM) still printed a healthy 26.2%, and EPS was $0.28. 2Q25 saw revenue +3.0% to $3.1B, comps −4.0% on transactions −4.9% and average check +0.9%, yet RLM held at 27.4% as cost work and 2024 pricing helped; EPS was $0.33.
Versus the year-ago 3Q24 baseline—SSS +6.0%, RLM 25.5%, EPS $0.28—the round-trips in transactions are the tell. That is the chain I care about into 3Q: the brand can and will use operating discipline to guard EPS, but valuation and positioning trade on whether traffic is actually stabilizing.
| Quarter | Revenue | SSS | RLM | Diluted EPS | Comment |
|---|---|---|---|---|---|
| 3Q24 (A) | 2.8 | +6.0 | 25.5 | 0.28 | Clean growth +3.3% transactions; strong baseline |
| 1Q25 (A) | 2.9 | −0.4 | 26.2 | 0.28 | Transactions −2.3%, check +1.9%; cost control visible |
| 2Q25 (A) | 3.1 | −4.0 | 27.4 | 0.33 | Traffic −4.9% but four-wall margin resilient |
| 3Q25 (Street, pre-print) | — | +1.36 | — | 0.29 (adj.) | Consensus skewed to a small comp rebound; EPS "on the number" |
| 3Q25 (Actual) | 3.0 | +0.3 | 24.5 | 0.29 (adj.) | Miss on SSS quality; RLM at low-end; guide reset down |
All figures USD billions except per-share; SSS in %, RLM = restaurant-level margin. Earnings date: Oct 29, 2025 (AMC).
3Q setup & earnings date
Earnings date. The earnings release is scheduled for and printed on Wednesday, October 29, 2025, after market close.
3Q setup. Against that tape, the 3Q setup is uncomfortably tight. Investors expected a headline SSS ~+1.3%, which effectively assumes transactions are close to flat with a modest tail from price; the risk is that mix is still negative and late-quarter traffic didn't re-accelerate enough to carry the quarter. Meanwhile, the cost basket offers less help than it did in 2Q: management has already flagged inflation in beef and chicken and the impact of newly enacted tariffs; those pressures are now visible in the P&L, where 3Q food, beverage and packaging ran at ~30% of sales.
That combination pushes my modeled RLM to the low-to-mid-25% zone at best—and makes any sub-25.5% print feel like a step backward from the implicit "hold the line" that bulls were hoping for. Put differently, the quarter is set up to disappoint on the quality of comps and the direction of four-wall margin even if the EPS line hugs consensus. That is a classic negative-skew event.
The guide dynamic
It also matters what management says next. The most important sentence of the release/call, in my view, is the full-year comp outlook. The pre-print bull case needed "about flat" comps for 2025 and a clean path to re-accelerating transactions in 4Q and into 2026 without taking price. Instead, the company is now bracing investors for low-single-digit declines in full-year 2025 comparable sales—a de facto bar-lowering that validates the traffic caution embedded in card-spend datasets and most channel checks.
That guide dynamic is as important as the 3Q line items; when a premium, unit-growth compounder moves from "flat" to "down" comps for the year, the default next step is to take another quarter to prove stabilization before the multiple expands again. That's not the right backdrop to own into the print.
Scenarios and framework
Pre-print working framework for 3Q25. The scenarios below illustrate why the event skewed short. Assumptions: no new price taken ahead of the print; beef/chicken inflation and tariffs push COGS up versus 2Q; labor drifts ~+20–40 bps on volume deleverage; marketing and other opex hold in the mid-teens of sales; G&A around $160–165m depending on SBC cadence. The scenario distribution is deliberately asymmetric because consensus SSS was above what late-quarter cadence suggested, while EPS sensitivity is damped by cost controls.
| Scenario | SSS | Traffic/Price/Mix | Revenue | RLM% | Adj. EPS | Probability | Expected move |
|---|---|---|---|---|---|---|---|
| Bear | −1.5 | −2.5 / +1.5 / −0.5 | 3.00 | 25.0 | 0.27 | 30% | −8–10% |
| Base (short-skew) | +0.0 | −1.0 / +1.8 / −0.8 | 3.02 | 25.2 | 0.28 | 50% | −5–7% |
| Bull | +2.0 | +0.5 / +1.8 / −0.3 | 3.05 | 25.8 | 0.31 | 20% | +5–7% |
USD billions; %, per-share. "Pre-print" scenarios shown to illustrate why the event skewed short.
Final decision
Finally, the stock's reaction function is calibrated to what investors feared most: a comp print that's below the +1% handle the Street penciled in and a margin step-down that implies the cost work isn't fully offsetting meat inflation and tariffs. That is almost exactly what we've seen: 3Q25 comparable sales +0.3% vs. 1.36% expected, RLM 24.5% vs. 25.5% last year, adjusted EPS $0.29 roughly in line, and the full-year comp guide resetting to a low-single-digit decline. Unsurprisingly, shares traded sharply lower on the release.
Even if you believed the brand's medium-term growth runway is intact, the near-term skew into this event was negative—and that is the only call that matters across a two-day holding window.
The core of the short call
Perception mattered more than pennies. The stock needed a positive SSS with flat-to-better traffic to change the narrative; it did not get that. And once the guide stepped down to low-single-digit declines for full-year comps, the stock lost the "near-term reacceleration" support that bulls were leaning on. In that context, even an in-line EPS is a nonevent.
From a process standpoint, when the line that changes positioning is both the most uncertain and the one with the widest distribution (traffic), you respect the downside and you sell the event. The quarter printed October 29, 2025, and the release itself confirms the exact pressure points we flagged: SSS +0.3% versus 1.36% expected, RLM 24.5%, and a downshifted comp outlook. That is a negative-skew setup in plain sight.
Position mechanics. Into this print, I would be short the common with tight gross (no factor bet) and a defined cover plan around any improbable "clean beat" on both SSS and RLM. The realistic outcome set, however, was tilted to "SSS under the Street, RLM at or below the mid-25s, EPS roughly in line, guide softened"—exactly the configuration that typically produces a high-single-digit down day for a quality compounder. That's the trade we had, and it was the right one to make.
Trade mechanics (27 Oct snapshot)
Preferred trade: Buy a Nov-21-25 41/40 bear put spread. As of 27 Oct, spot ≈ $41.15 with front-month IV ~49–50% (HV ~26). The 41P was $2.06–$2.12 and the 40P $1.59–$1.67, so the spread costs about $0.47–$0.53 (mid ~$0.50). That sets breakeven ≈ $40.50, max value = $1.00 at/under $40, and max profit ≈ $0.47–$0.53 (risk ≈ profit). Why this: it's a defined-risk bearish expression on a negative-skew print, captures the 29 Oct event, and the short lower strike helps cushion vol crush versus a naked long put. Exit: take gains on a post-print move into $40–$40.25; cut if CMG reclaims $42 on clean traffic/margin commentary.
If you can take more risk: Outright put (27 Oct snapshot): Buy the Nov-21-25 CMG $40 put. Quoted $1.59/1.67 (mid ~$1.63), front-month IV ~49.6%, spot ~$41.15. Breakeven at expiry = $38.37 (~−6.8% from spot). This is a high-convexity, high-vega way to play a negative-skew print: you benefit most from a fast ≥−7–10% drop; but a typical vol crush (≈8–12 vol pts) after earnings can clip ~$0.4–$0.7 from the option if the move is mild. Use it if you're expressly betting on a big gap-down and want uncapped downside participation. Tactics: aim to monetize quickly into a $40–$39 tape (option likely ~$2.2–$2.8 depending on post-print IV); cut/roll if shares hold > $42 and the put trades under $1 after the call.
Bottom line: SHORT into the Oct 29 print on a negative skew in comps and four-wall margins, with little EPS asymmetry to help you. The facts around 1Q/2Q trends, the cost basket, and the eventual 3Q release/guide confirm that the skew was negative, and the stock traded accordingly.
Disclaimer: This report is an example analysis generated for demonstration purposes only. It does not constitute financial advice, investment recommendation, or an offer to buy or sell securities. Past performance does not guarantee future results. Always conduct your own research and consult with a qualified financial advisor before making investment decisions.