(Bloomberg Gadfly) -- It's been a long time now since Chipotle Mexican Grill Inc. lost its magic.
The once high-flying burrito chain came unmoored in late 2015 when a disastrous food-contamination scare sent diners fleeing. As it focused on shoring up food-safety procedures and building marketing buzz to win customers back, new problems emerged: Lines were moving slowly and dining rooms were messy. New menu items such as chorizo and queso weren't game-changers.
The company's Tuesday earnings report underscored how difficult it is proving for Chipotle to mount a comeback.
Yes, comparable sales rose a modest 0.9 percent over a year earlier, but that was largely thanks to a price increase at about 900 of its restaurants. The chain saw a decrease in transactions during the period, indicating it is still struggling to boost foot traffic.
And yet, if you look at Chipotle's valuation, I'm not sure Wall Street has fully grasped the restaurant's new reality.
To be sure, investors have sold off plenty of Chipotle stock as the chain's problems have piled up:
But Chipotle still has a trailing P/E ratio of 49, according to data compiled by Bloomberg. That is far higher than the median P/E ratio of 24.5 for a group of Chipotle's restaurant-industry peers tracked by Bloomberg Intelligence.
The only restaurant in the group with a higher trailing P/E ratio is Shake Shack Inc., a burger joint that, unlike Chipotle, is still in something close to start-up mode. It had only 143 locations at the end of its latest quarter and debuted on the public market in 2015.
If you look at forward P/E ratios in the sector, Chipotle isn't quite as much of an outlier. Chipotle trades at nearly 29 times estimated earnings, compared to a median of 21.2 for its peer group. But still, it commands a higher premium than all but five chains in this set.
By either measure, I find it hard to justify such a rich valuation for Chipotle relative to its peers at this point in its turnaround effort.
For one, Chipotle can only wring so much more sustainable growth out of opening new stores. It had 2,408 locations at the end of the latest quarter, the company said Tuesday. As UBS analyst Dennis Geiger pointed out in a recent research note, Chipotle restaurants already are increasingly forced to compete with each other for business.
UBS found that 70 percent of Chipotle locations compete with another Chipotle outpost located within a 10-minute drive. That is up from the 63 percent "cannibalization share" the chain had back in the first quarter of 2013, and it is also higher than that of several of Chipotle's peers. Qdoba, for example, has a 46 percent cannibalization share, while Baja Fresh has a 39 percent share, UBS found.
Meanwhile, Chipotle will continue to face significant bottom-line pressure, as a tight labor market will likely push up wage expenses.
And other key aspects of Chipotle's future are currently shrouded in uncertainty. Sure, the company is searching for a new CEO to replace founder Steve Ells. I understand why this makes investors optimistic, as Ells hasn't exactly done a great job lately. But we have no idea what strategies the new leader will cook up and whether they'll be effective.
It's true that increasing digital orders could be a pathway for boosting Chipotle's sales per restaurant, and we've gotten hints the company is making inroads here. Its second "make lines," which are used for assembling digital orders, accounted for 8 percent of total sales in the third quarter, executives said back in October.
But Chipotle is not exactly trampling the competition in the all-important digital realm: Domino's Pizza Inc. got more than 50 percent of its total U.S. sales from digital orders in its latest full fiscal year. Starbucks Corp. said mobile order and pay accounted for 11 percent of transactions at its U.S. company-operated locations in the latest quarter. Both of these chains have lower trailing P/E ratios than Chipotle.
Chipotle's rise was one of the more remarkable ones the retail industry has seen in recent years. It didn't create fast-casual dining, but it was essential in catalyzing a deluge of demand for it. But investors should get real about where Chipotle stands now: in an extremely crowded field, with few obvious distinctive advantages.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Sarah Halzack is a Bloomberg Gadfly columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.
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