In a year where the S&P 500 has returned 16%, it's striking to see shares of both Shake Shack (SHAK 0.76%) and Chipotle (CMG +0.03%) suffer so badly. Both stocks are down more than 30% year-to-date, and while the entire fast-casual dining sector has been under pressure this year, that doesn't fully explain their selloffs. After all, the AdvisorShares Restaurant ETF, a pure-play fund designed to track the broader sector, is only down 3% year-to-date.
Despite their similar stock trajectories for the year, these fast-casual dining companies are fighting different battles. Here's why I'd much rather own shares of Shake Shack—though neither are buys today.
Chipotle took the fast-casual dining concept mainstream. Now it's losing its own game.
Since Chipotle's initial public offering (IPO) nearly 20 years ago, shares have returned just over 4,000%. Coincidentally, it just opened its 4,000th restaurant last week, an eight-fold increase from the 581 restaurants it had up and running in 2006, the year of its IPO. That year, it reported $820 million in revenue and $41.4 million in net income, with same-store sales growing 19.7% in the first quarter. For all of 2006, same-store sales grew 11.9%, to $1.61 billion. The company even managed to grow same-store sales by 2.2% during the financial crisis of 2009, and fifteen years later, during the pandemic, it grew same-store sales by 15.2% for 2021.
NYSE: CMG
Key Data Points
But consider... last quarter, Chipotle grew same-store sales by just 0.3%, far more slowly that in did during the height of the Great Recession. The prior quarter, same-store sales declined by 4.0%, and Q1 saw a decrease of 0.4%. These same-store sales numbers range from meager to grim, and they're in contrast to the 7.4% same-store sales growth that Chipotle achieved for all of 2024.That was essentially unchanged from the 7.9% same-store sales growth of 2023.
So Chipotle only recently lost its mojo, but it's undeniable something's wrong. Restaurant-level margins are falling in tandem with same-store sales, and as CEO Scott Boatwright mentioned in his earnings call, low-to-middle income diners are visiting Chipotle less often, even after the company addressed a 2024 controversy over portion sizes by directing 10% of stores to re-train in portion-sizing.
IMAGE SOURCE: GETTY IMAGES.
In that earnings call, the word "turnaround" was never mentioned. Yet management cut its forecast in comparable sales to a low-to-mid single digit decline, while also noting declining restaurant-level margins. And in a tone-deaf move, management touted buying back $687 million shares at an average price of $42.39 per share. Yet shares fell by nearly 30% after that October 28 earnings call; management would have done better to wait, or better yet, invest that $687 million into improving the company's operations instead.
Shake Shack shares have only one problem—but it's a dealbreaker
Shake Shack doesn't have any of Chipotle's current woes. It's growing same-store sales at a healthy clip, most recently by 4.9% year-over-year last quarter, and sales are up 15.7% year-over-year. And while Chipotle plans to open around 350 new locations in 2026, growing its store count by around 8%, Shake Shack is launching the most ambitious expansion plan in its history, with the goal of tripling its stores. Last quarter alone, it opened 21 new company-owned and licensed "Shacks," bringing its store count to over 630 worldwide.
The biggest reason I see to be bullish on Shake Shack is this: It's increased same-store sales for 19 quarters in a row, despite raising prices several times during that streak. That's pricing power, or the ability to raise prices without hurting sales, and it indicates a loyal customer base. Combine that with the potential for rapid expansion and margins that keep improving, and it's easy to envision earnings per share multiplying in the years ahead.
NYSE: SHAK
Key Data Points
Even so, I wouldn't move on Shake Shack just yet. Its price-to-earnings (PE) ratio of 84 is too lofty, and it seems that a best-case scenario for the company is already priced into shares. For context, the companies making up the S&P 500 have an average PE ratio of just under 30 today.
Even a great business can be overvalued, and buying overvalued stocks tilts the odds against you as an investor. While Shake Shack is a more promising buy than Chipotle, I would wait for its valuation to come down to a more reasonable level, either through falling share price or growing earnings, before buying.