What Price Increases At Chipotle Would Mean For The Bottom Line

“We believe current valuation appropriately reflects an improving top-line trajectory, offset by limited visibility into Chipotle Mexican Grill, Inc.’s CMG nearterm margin trajectory,” Wedbush’s Nick Setyan said in a note, while maintaining a Neutral rating on the company and a price target of $400.

Comp Expectations

The analyst mentioned recent checks of 5 percent of the company’s comp base units suggest same-store sales growth in the first quarter would, at least, be in line with the consensus forecast of 14.9 percent.

“Promotions (both online and mailers), fundraisers, busier lunch, improved weather, and compares versus LY’s (last year’s) outbreak were all cited as drivers,” Setyan stated.

In cases where sales declined, the main reason now being cited has returned to the pre-crisis response of cannibalization.

“The implied March run rate puts Q2’s comp expectation within the realm of possibility, in our opinion,” the analyst went on to say, explaining the implied March same-store sales growth run rate of high single digit to low double digit would bridge some of the gap “towards the step up needed to render Q2 SSS growth consensus of 8.6 percent achievable.”

Setyan believes that with Chipotle Mexican Grill’s national advertising scheduled to begin in April, the smaller, but incremental, step up to achieve the Q2 and 2017 expectations appears realistic.

Price Increases

However, the analyst pointed out, “Given the recent uptick in avocado costs even as the remainder of the basket remains relatively benign, we believe the incremental risk is now from food cost inflation relative to low-34 percent guidance for 2017.”

Setyan continues to believe there is a “high probability” of an upward margin inflection in 2018, ahead of expectations, given that Chipotle Mexican Grill’s incremental labor investments in 2017 have “anniversaried” and a price increase is late 2017 or early 2018 is likely.

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