Key Points

Chipotle stock is down 50% from its peak three years ago.
The burrito chain has not grown comparable sales by more than 0.5% in at least five quarters.
The company revamped its loyalty program in the second quarter.

Chipotle Mexican Grill (NYSE: CMG) has long been a strong stock performer, but recent results have disappointed investors.

The stock has fallen more than 50% from its high point several years ago after losing star CEO Brian Niccol, seeing slower same-store sales growth, and facing a lower valuation as long-term growth forecasts were reduced.

Chipotle is down 10% year-to-date as its performance has lagged. Comparable sales rose just 0.5% in the first quarter while the operating margin dropped from 16.7% to 12.9% due to the biennial All Managers Conference and higher labor costs from wage inflation.

So what might investors see when Chipotle releases second-quarter results? Let us examine the details.

Can Chipotle recover?

Chipotle same-store sales in the first quarter marked the best showing in at least five quarters, highlighting ongoing challenges. Average restaurant sales have declined each quarter in that span, reaching $3.09 million in the first quarter.

Chipotle faces many of the same issues as its peers. Inflation has squeezed consumers and the chain has lost some of its most price-sensitive patrons, including lower-income diners and younger adults. Like other fast-casual brands, Chipotle contends with views that its prices are elevated and increased rivalry from casual dining chains such as Chili's.

Events in the Middle East have lifted inflation in the second quarter, so Chipotle is unlikely to gain relief from discretionary spending at the broad level.

Some factors offer optimism for Chipotle investors. Data from Placer.ai show the chain recorded positive same-store traffic in every month of the second quarter, averaging roughly 1% growth.

The steep stock decline over recent years also leaves the shares more reasonably valued, trading at a price-to-earnings ratio near 30, roughly in line with the S&P 500. That is not an attractive multiple for a firm struggling to grow earnings, yet it suggests the stock may hold steady unless sales growth turns sharply negative.

The company also relaunched its rewards program with added benefits such as monthly free food offers and simpler point redemption. Sign-ups rose sharply after the announcement.

What to expect from the Q2 report

Given the new loyalty program and Placer.ai traffic data, Chipotle appears positioned for same-store sales growth. Still, inflation and loyalty costs are likely to weigh on margins, which is the area investors are watching most closely now.

Analyst consensus projects earnings per share will slip from $0.33 to $0.32. With that outlook, investors will need patience for any Chipotle rebound. If profits decline again, the stock could fall further. Chipotle remains a show-me story, and management must demonstrate it has addressed the hurdles of recent years.

Should you buy stock in Chipotle Mexican Grill right now?

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.